Comment

We have earlier seen how income on capital up to Rs 78 lakh can be made tax-free by using the provisions of Sec. 56 in conjunction with the basic exemption limit. This is essentially done by effecting gifts of one’s post-tax capital to one’s parents and major children, who otherwise are not taxpayers. When the recipients of the gifts invest the money, the entire family can earn income free of tax.

Many readers have written in seeking additional details on Sec. 56 and how the scheme of gift tax actually works. We shall examine the provisions of gift tax in the context of the Indian law.

For starters, gift tax has been discontinued since October 1, 1998. However, Budget 2004 resuscitated it by way of a backdoor entry. In other words, gift tax has been brought back by way of an income tax on the recipient. There are certain exceptions, of course, but before going into the details, let me share with you a real life incident which is very much relevant to today’s column.

One of my friends, Rajiv, had called me to check if he could give a gift to his maternal aunt without any tax consequence. The amount was somewhat large, so he thought he would double check.

Now, gifts between relatives being tax-free, I told him to go ahead. That evening, it was sheer coincidence that while working on some other problem, I came across Sec. 56 (which taxes gifts between non-relatives) and was shocked. A repeated reading of the section yielded the same conclusion — the information given to Rajiv was erroneous — the transaction would be taxable!

Discovering an anomaly: The reason was an anomaly of sorts in the law. Between two people, A and B, A may qualify to be a relative of B, but B may not qualify to be a relative of A. In other words, as per the definition, Rajiv’s aunt is his relative, but Rajiv is not hers.

How? As per the law, if a sum of money over Rs 50,000 is received by an individual or a Hindu Undivided Family (HUF) without consideration, the aggregate value of such sum will be taxable as the recipient’s income.

There are seven exceptions to this. These are, gifts received:
a) from any relative; or
b) on the occasion of the marriage of the individual; or
c) under a will or by way of inheritance; or
d) in contemplation of death of the payer;
e) from any local authority;
f) from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in Sec. 10(23); and
g) from any charitable trust or institution.
The word “relative” here means
i) spouse of the individual;
ii) brother or sister of the individual;
iii) brother or sister of spouse of the individual;
iv) brother or sister of either parents of the individual;
v) any lineal ascendant or descendant of the individual;
vi) any lineal ascendant or descendant of the spouse of the individual;
vii) spouse of the persons referred in clauses (ii) to (vi).”

However, the main concern is with the clause concerning relatives. Note that the clause mentions gifts received from a relative will be non-taxable. This means that the donor has to be a relative. In Rajiv’s case, you will notice that he doesn’t fit in any one of seven clauses, which define the term “relative”. However, if it was the maternal aunt that was intending to give him a gift, she will qualify as a relative by means of clause (iv) above as she is Rajiv’s mother’s sister.

More qualms : While at it, there are some more misgivings. Only “a sum of money” is covered under the provisions. Is this really the intention of the law? What if other assets such as shares, gold, mutual fund units or even property are gifted between relatives? Would these be tax-free too? Or does the term “a sum of money” envisage other productive assets too?

Also, this clause is applicable only in the case of gifts received by an individual or an HUF. Ergo, a firm, company, association of persons, body of individuals can remorselessly keep on gifting each other without bothering about the long arm of the law. What about trusts? Some courts have been known to hold the status of a trust as an individual.

Now, for the other debatable point: While it is clear that gifts over Rs 50,000 are taxable in the aggregate, i.e. if a gift of Rs 60,000 is received from a non-relative, the whole of Rs 60,000 will be taxable and not Rs 10,000 (Rs 60,000 - Rs 50,000), what about individual gifts that are each below Rs 50,000 but in all exceed the figure? For example, can a person receive say five gifts of Rs 25,000 each and not pay tax?
Tax experts are of the view that since the total amount of gifts received is above Rs 50,000, the entire sum will be taxable, notwithstanding the fact the each one of them is below Rs 50,000.

Last point : But, there is a way out for Rajiv. He cannot gift money to his maternal aunt, but he sure can give a gift to his mother. There would be no tax there. Similarly, his mother can give a gift to her sister, i.e. Rajiv’s maternal aunt. No tax again.
sandeep.shanbhag@gmail.com.