A gift from someone is always welcome. The hitch is when some, especially financial gifts, become taxable. Even so, not always; gifts from relatives are exempt from income tax (I-T). And, gifts from non-relatives can also be tax-exempt, under certain conditions.
Some assets for which I-T is applicable, if gifted, are:
- Cash of more than Rs 50,000
- Immovable property such as land and buildings
- Movable property – shares and other securities (debt, derivatives, futures & options)
- Jewellery and bullion
- Art and antiquities (paintings, sculptures and so on).
Now, situations when gifts from non-relatives can also be exempt from tax:
Gift as inheritance
All gifts under a will, and all amounts received on the death of a person as a part of the inheritance, are fully exempt from I-T. Says Mayur Shah, tax director at EY, “When assets or gifts are received as inheritance even from non-relatives, it is exempt. The assets can be passed with or without a will.” For instance, someone has no relative and gives away all his wealth to a friend. The friend will not be taxed for the assets got.
Here, the onus of proving the assets got were under inheritance is with the friend, say experts. On the owner’s death, the friend will require a probate (the term for legally certifying the will for implementation) from a court. The court will wait for a year, to check if someone else comes forward as a blood relation or heir to the assets. This will need to be announced through a newspaper – in English and a regional language. If no one comes forward, the probate will be issued and the property transferred in the friend’s name, say experts.
Under Section 56 of the I-T Act, certain gifts are liable to income tax as ‘income from other sources’. This provision is applicable only for individuals and Hindu Undivided Families (HUFs). Even if a gift is received by any Trust or Association of Persons, it is not liable for I-T as “income from other sources”.
Again asset transfer from a Trust should be as inheritance or it will become taxable, says Shah. For example, if a person creates a Trust when he’s alive where the beneficiaries are non-relatives and which dissolves on the death of the Trust creator, it might not always be considered inherited assets.
On contemplation of death of a donor
Shah of EY says if an individual has a fatal disease and it is known he might not survive for long, he can transfer all his assets (as gifts) to his near and dear ones while alive. The near and dear need not be relatives. In such cases, the beneficiary(ies) may not have to pay I-T on the assets received.
From public charitable trust or institution
Many registered charitable institutions and non-government organisations provide financial help to individuals for education or medical treatment. Such monetary help is also exempt from I-T. A fund from any foundation, university or other educational institution or hospital or any trust or any institution referred to in Section 10(23C) are all exempt.
Thus, scholarships, stipends or charities received from a charitable institution would be completely exempt from I-T in the hands of the recipients, says Shah of EY. Here, there is no monetary threshold, provided the trust or institution giving the charity is registered under Section 12AA.
Cash of less than Rs 50,000
Rajesh Srinivasan, partner at Deloitte, Haskins and Sells LLP, says cash gifts of any amount less than Rs 50,000 from a non-relative are exempt from I-T.
Thus, some experts advise accepting cash gifts of more than Rs 50,000 in a financial year only from relatives, as it is completely exempt from tax. It is important to know the definition of the word ‘relative’ for this purpose. It can be
- Spouse of the individual getting the gift
- Brother or sister of the individual getting the gift
- Brother or sister of the spouse of the individual getting the gift
- Brother or sister of either of the parents of the individual getting the gift
- Any lineal ascendant of the individual getting the gift or his/her spouse
For instance, if X receives a gift of Rs 1 lakh in cash from his father’s brother or paternal uncle, it would be exempt from I-T, since the paternal uncle would be a brother of the parent of the individual getting the gift and would come within clause (iv) above.
Hence, whenever you receive any gifts from relatives, check whether the person concerned comes within one of these categories. If not, he would be considered a non-relative and gifts from such people would be exempt only to the extent of Rs 50,000 in a financial year. Since a HUF can’t have relatives, any gifts received by it in excess of Rs 50,000 in a year would be liable for I-T.
Importantly, says Kuldip Kumar, executive director (tax & regulatory services) at PwC, one should be careful when getting gifts from relatives abroad because of the black (unaccounted) money issue. “Also, many a time to avoid tax on gifts from strangers, people route such expensive gifts through relatives abroad (where different laws may be applicable). Here, if the relative is a retired person or a housewife who doesn’t earn, you can be caught for avoiding tax,” he adds. Even cars received as a gift from non-relatives will be tax-exempt.
The provision of taxation of gifts became applicable in respect of those got on or after September 1, 2004, and before April 1, 2006, if a monetary gift exceeds Rs 25,000. From April 1, 2006, this amount was increased to Rs 50,000, so that cash gifts and gifts by cheque or bank draft from non-relatives and from non-exempted categories can be fully exempt from I-T up to Rs 50,000 in aggregate in one financial year.
On marriage or such occasions
“Any gift received from any person (a non-relative) on the occasion of marriage or any other such ceremonial occasions would not be liable to I-T at all,” says Srinivasan of Deloitte, Haskins and Sells. There is no monetary limit attached to this exemption.
Experts say the hitch is that it has so far not been clarified if gifts for a specific ceremony like marriage or child birth should have been received on the date of marriage or can be got a few days before or after, too. Typically there isn’t any problem as long as the gift received was for the recipient’s marriage but there is no exact clarity on it.