Gifting is not always tax-free

Gifting has been the most prevalent way of transferring property for a long time. It has always been a very important subject not only for the legislature and the revenue authorities but also for the general public. Gift means giving away a thing on one’s own volition. In technical terms a gift means the transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration in money or money’s worth.

Our legislature and revenue authorities have been very watchful where property is transferred by way of a gift, as in many cases, gifts are often used as a tool for minimising the tax liability.
For 40 years, until 1998, the giver of gifts was taxable in India under the Gift Tax Act, 1958.

Thereafter, from October 1998 to August 2004, on any amount received as a gift or without consideration, no tax was leviable either for the giver or the receiver. This period of six years opened up doors for bogus capital-building and money laundering.

To plug this loophole, the finance minister brought the taxability of gifts within the ambit of the Income-tax Act, 1961.

Under the Act, any sum of money received by an individual or a Hindu undivided family (HUF) in a particular financial year, without consideration, the aggregate value of which exceeds Rs50,000,
became taxable in the individual’s/HUF’s hands.

Effective from October 1, 2009, the scope of the taxability provisions in respect of gifts has been enlarged to include immovable property, being land or buildings or both. If any immovable property is received without consideration, whose stamp duty value exceeds Rs50,000, the stamp duty value of such property would be taxable.

Similar to immovable property, certain other gifts received have also been brought under the tax net, with effect from October 1, 2009. These include shares and securities, jewellery, archeological collections, drawings, paintings and sculptures. In these cases, if the aggregate fair market value (FMV) of the benefit received by way of a gift exceeds Rs50,000, the gift would be taxable in the recipient’s hands.

Under the Act, only the specified gifts are taxable. From the table it is clear that in various categories, if the amount of sum of money or the FMV of the property received without consideration or if the difference in consideration shown and FMV/stamp duty is within Rs50,000 then it will not be subjected to tax.

Also, in the following cases, gifts received are not taxable (even if the value is above Rs50,000):
(a) Receipt of gifts from relatives is not taxable. The term “relative” includes a spouse, brother, sister, brother or sister of spouse, brother or sister of either of the parents, any lineal ascendant or descendant of the individual or of the spouse and spouse of any of the persons mentioned above.
(b) Receipt on the occasion of marriage. It is customary to receive gifts of money and in kind on the occasion of marriage. Therefore, this is a welcome exception to the general rule.
(c) Receipt under a Will or by way of inheritance or in contemplation of death of the payer.
(d) Receipt from a local authority as defined under the Act.
(e) Receipt from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution specified under the Act.

It is pertinent to note that while there is no tax on gifts under the aforesaid circumstances, the revenue authorities will be within its powers to treat even such unexplained or unproved gifts as cash credits. It would, therefore, be prudent to maintain documentary evidence (such as a gift deed/letter of understanding) in respect of gifts received, to avoid any dispute with the revenue authorities at a later stage. This is particularly relevant in cases where the gift amount is substantial and also where it is received from relatives.

Sundeep Agarwal is associate director and Krishna Kanakia, senior manager - tax and regulatory services, PwC India