Exchange of gifts as a token of love and affection is a very common scenario in India. But, very few people know that even gifts come under the circumference of taxes and there are many tax implications to it. While one cannot avoid Gift Tax, we can always understand about Gift Tax Rules and exemptions and see if we can reduce gift tax. This article would provide a complete guide about Gift Tax Rules and Exemptions that are applicable from 2019 onwards.
What is the Gift Tax in India?
Gift Tax is regulated by the Gift Tax Act, which was introduced in the Parliament of India in the year 1958. However, with effect from October 1, 1998 gift tax got demolished and all the gifts made on or after that date was free from tax.
In 2004, the Act was revived again partially. The Finance Act 2004 introduced Sec. 56(2) (v) for taxing gifts in the hands of the recipient. According to this Act, the gifts received by an individual or HUF in excess of Rs. 50,000 in a year are taxable.
As per the Act, 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.
What is a Gift Tax Rate in India applicable for FY2018-19 onwards?
The Gift Tax Law was amended in 2017 and it continues even today. Gifts received by an individual or HUF (Hindu Undivided Family) are taxable in the hands of the recipient. If he receives the tax of an amount anything above Rs. 50,000, the entire amount is added to your income under the head “Income from other sources” and taxable as per your applicable tax slab. Means Gift Tax Rate in India is the same as the individual income tax slab rate applicable during that financial year.
What are various kinds of Gifts Received?
Let us understand the various types of gifts received.
1) Sum of Money Received without any consideration
2) Immovable property received without consideration. This includes land, building, etc.,
3) Immovable property received for inadequate consideration / less than the stamp value of the property.
4) Movable property received without consideration.
5) Movable property received for inadequate consideration / less than fair market value (FMV).
6) Gifts received by an employee from the employer.
Now let us look into the gift tax applicable for the above-mentioned gifts.
#1 – What is the Gift Tax on the money received without consideration?
The aggregate value of cash gifts received in a financial year without any consideration would be taxable as other income in the hands of the recipient. If the aggregate value of such gifts is less than Rs. 50,000, it is exempt from tax, but if it is more than, the entire amount is taxable. For instance- If an individual receives gifts worth Rs. 60,000 in a tax year, this entire sum is taxable in the hands of the recipient. On the other hand, if the aggregate value of gifts is less than Rs. 50,000, then it is exempt from tax.
In simple terms, if the gift received is > Rs 50,000 entire amount is taxable.
What is the gift tax on an immovable property without consideration?
Immovable property includes land or building. If you receive any immovable property as a gift without any consideration, and the stamp duty value exceeds Rs. 50,000. Then, the stamp duty value will be chargeable to tax in each such transaction.
In simple terms, if stamp duty value is > Rs 50,000, the entire Stamp duty value of the immovable property is taxable.
What is the gift tax on immovable property with a consideration which is less than stamp value?
If any immovable property is received for a consideration which is less than the stamp value of the property, then if the difference between the stamp value and the consideration exceeds Rs. 50,000, it is chargeable to tax on each transaction.
In simple terms, gift tax would be on stamp duty value minus consideration received.
What is the gift tax on the movable property without consideration?
The movable property includes shares and securities, archeological collection, jewelry, drawing, painting, etc. It is worth noting here that although cars and bikes are movable, still they are considered as immovable property. If the aggregate fair market value of the movable property received as a gift without any consideration exceeds Rs. 50,000, the entire aggregate fair market value of the movable property will be chargeable to tax.
In simple terms, gift tax would be on the fair market value.
What is the gift tax on movable property with a consideration which is less than fair market value?
If any movable property is received as a gift with the consideration which is less than fair market value. Then, if the difference between the fair market value and consideration is exceeding Rs 50,000, it is chargeable to tax.
In simple terms, gift tax would be on the fair market value minus consideration received.
How is the gift from an employer treated?
The legislation has provided provisions for the gifts received from an employer. Such gifts are taxable in the hands of the employees as salary income provided that the aggregate value in a year is Rs. 5,000 or more.
What are Gift Tax Exemptions applicable in India?
There are few Gift Tax Exemptions too:
1) You can receive any amount of gifts from your relatives without giving rise to any tax liability. The following relations are covered in the definition of relatives:
a) Spouse of the individual
b) Brother or sister of the individual
c) Brother or sister of the spouse of the individual
d) Brother or sister of either of the parents of the individual
e) Any lineal ascendant or descendant of the individual
f) Any lineal ascendant or descendant of the spouse of the individual
g) Spouse of the person referred to in clause (b) to (f)
2) Gifts received by the bride and the groom from their relatives, friends or anybody at the time of marriage are free from any kind of tax liability. Moreover, the gifts received on the occasions related to marriage like Tilak, Tika, Engagement, etc. are also tax exempted.
3) Any property or amount received by way of a Will or as a part of inheritance will be free from any Gift Tax in India.
4) Any gift received from Local authority, Panchayat, Municipality, Municipal Committee and District Board, Cantonment Board.
5) Any gift received from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to Section 10(23C).
6) Any gift received from Any charitable or religious trust registered under section 12A or section 12AA.
7) Any gift received from members of HUF from HUF distribution of capital assets on the total or partial partition of a HUF.
8) Any gift received from the trust which is solely created or established only for the purpose of the benefit of the relative of the individual.
Please note that cash gifts above Rs 200,000 are subject to penalty from April 1, 2017, even if the gifts are from family members. Hence, one should avoid them.
How to document gifts received for future IT verification?
To avoid any problems in the future for IT verification, it is recommended that one should keep all the documents and proofs of all the gifts received. For the gifts of movable property, it is required to be made in stamp paper and stamped. Registration of gift deed is not required in this case, but for the gift of immovable property, it is not valid as per law unless it is registered and the title cannot be passed to the receiver.
Conclusion: Gifts have always been a medium of expressing love and affection to the near and dear ones. But with the tax implications on the gifts, it has become important to know all the rules regarding gift tax to avoid paying the excess tax or penalty.