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Tuesday, November 06, 2012

What is in a Gift - Know about Gift Tax in India

Most of us consider giving and taking gifts as a normal tradition in India and may not have ever bothered to even look at the fact that this could also have some serious tax implications. The last thing that you want to think of while receiving a gift from your loved one is about its tax implications.

The Gift Tax has had a bit of a roller-coaster ride in India; There was a brief period when it was abolished and then it got renewed later. Let us look at a little bit of history

Gift tax in India is governed under the Gift Tax Act constituted on April 1, 1958. As per the Gift Act 1958, all gifts in excess of Rs. 25,000, in the form of cash (including draft / cheque), received from one who does not have blood relations with the recipient, were taxable.

However, with effect from October 1, 1998, gift tax got demolished and all the gifts made on or after the date were free from tax.

But in 2004, Gift Tax was again revived partially and a new provision was introduced in the Income Tax Act 1961 under section 56 (2). According to this,"any gifts" received by any individual or Hindu Undivided Family (HUF) in excess of Rs. 50,000 in a year would be taxable (there are exceptions to this which we will deal with subsequently). Note that the individual who has recd the gift is going to be taxed and not the person giving the gift.

The 'any gift' clause means that not only cash but all gifts of any value. So if someone receives a gift of a house worth Rs 30 lakh (Rs 3 million), then he/she is automatically in the highest income bracket and has to pay 30% + surcharge on value of the house as tax (close to Rs 10 lakh (Rs 1 million) in this case).
The rule thus effectively prevents money laundering in the guise of high value gifts. 

Exemption from Gift Tax:
In the following case, the receiver of the gifts will be exempt from applicable gift tax:
1) The gift being given by a blood relative, irrespective of the gift value. So, was this a sigh of relief? :)
2) Immovable properties located outside the country
3) Gifts received from relatives (including non blood relatives) on the occasion of marriage.(including gifts received by daughter-in-law from parents-in-law; but excluding gifts received by son-in-law from parents-in-law)
4) All gifts received by way of a will and inheritance
5) NRIs gifting parents in India from their NRE account

It is important to understand who falls under the "relative" terminology as defined in the tax laws

Defining Relatives
The section goes on to define the term "relative" to ensure that there are no loop holes which could in turn lead to some sort of money laundering. The relations who would come under the ambit include
  • Spouse of the individual
  • Brother or sister of the individual
  • Brother or sister of the spouse of the individual
  • Brother or sister of either of the parents of the individual
  • Any lineal ascendant or descendant of the individuals ie children and grandparents.
  • Any lineal ascendant or descendant of spouse of the individuals
  • Spouse of the Brother / sister of individual or brother/ sister of spouse of individual

Gifts received by children
The gifts received in the names of one's minor children will be clubbed with the parents' income for taxation purpose.
Also the taxman is very alert in saying that, in case of both parents having income, clubbing will be done with that parent who is earning more.
So one cannot hide under the cover of their minor child(ren) receiving the gifts.

Real estate Gifts
Real estate deals done for values lower than the rates fixed by state governments / local bodies will also be taxed, because the difference in the value is essentially a gift. Here, the tax will be levied on the difference of amount between state government's rate and purchase price. The tax needs to be paid by the buyer of the property.

An effective curb against money laundering
It was found that many individuals used the loopholes in this act, to launder money.  The key reason for bringing back Gift Tax in its latest avatar is to plug loopholes and make norms more stringent. It is clear that exchanging assets amongst relatives to evade taxes have come under control and this has also ensured that the Income tax authorities can keep tab on the movement of assets (movable / immovable).


Manoj Arora