It is also essential for individuals to evaluate their transactions to check if they fall under any of the taxable scenarios covered. If yes, they should voluntarily disclose the income in their individual income-tax returns as appropriate, to ensure compliance.
It is the season of festivals and gifting to our near and dear ones is customary. While gifting, one should be aware that there could be tax implications for both gifts given/ received. Keeping this in mind, let us look at what could these implications be for the person gifting, i.e., the giver and the receiver/beneficiary of such gifts.
Some of the gifts which are not considered as income in the hands of the recipient and have no tax implications in the hands of the person gifting, irrespective of the amount of the gift, are as follows:
- Gifts from a relative – defined under the income-tax laws to include spouse, brothers/ sisters (and their spouses) of the individual/ individual’s spouse/ individual’s parents, lineal ascendants/ descendants (and their spouses) of the individual/ individual’s spouse.
- Gifts on the occasion of marriage of the individual
- Gifts under a will or by inheritance
- Gifts in contemplation of death of the donor (i.e., gifts given by a person in anticipation of his/ her death in the near future)
Other than the above exempt category, the following kinds of gifts are taxable in the hands of the recipients:
- Money: This could be given in cash/ cheque/ electronic mode. If the total value of money received by an individual during a financial year exceeds Rs 50,000, the entire amount of money received by such individual will be taxable as ‘income from other sources’ for that individual. The gift will then be taxable at the tax rates applicable to him/ her.
- Immovable property: Land and/or building may be received as a gift by an individual without consideration or for inadequate consideration. Where it is received without consideration (i.e., without paying anything for it) and the stamp duty value (i.e., value adopted by the authorities for payment of stamp duty) of such property exceeds Rs 50,000, the entire stamp duty value of the property would be taxable in the hands of the beneficiary. Here the limit of Rs 50,000 applies per property received. If the property is received for a consideration and the stamp duty value of such property exceeds the consideration by higher of Rs 50,000 and 10% of the consideration, then the stamp duty value in excess of the consideration would be taxable as income in the hands of the beneficiary. For example, if the stamp duty value of the asset is Rs 10,00,000 and the consideration is Rs 7,50,000. Then the difference of Rs 2,50,000 (which is higher than Rs 50,000 and 10% of the consideration, i.e., Rs 75,000) will be taxable as income from other sources in the hands of the recipient.
- Moveable property such as gold, shares etc.: Again, this may be received without consideration or for inadequate consideration. Where the gift is received without consideration and the fair market value (FMV) of such gift exceeds Rs 50,000, the FMV of the property will be taxable as income. In case the property is received for a consideration, which is lower than the FMV by an amount exceeding Rs 50,000, then the amount of FMV in excess of the consideration will be taxable as income from other sources in the hands of the beneficiary.
(iii)Gifts/money transfers that have tax implications for the giver
The above situations are where the gift/ value of the asset is taxed in the hands of the recipient. However, there are certain situations where a gift could lead to tax implications for the giver in order to curtail tax evasion and protect the interest of the revenue. Examples of this include the following:
1. Say an individual lets out a house property and the rent is paid to the individual’s spouse/ parents/ children. In such case, the rent will be considered to be the individual’s income and he/she will be taxed on it. The rent being paid directly to the individual’s specified relative(s) would be treated as a gift by the individual to those relatives, but the rent would first be treated as income of the individual. Thus, gifting the rent directly does not remove the house owner’s liability to pay tax on it.
2. It is very common for parents to open bank accounts on behalf of their minor children and deposit money into it. The money deposited by the parents would presumably be from their tax-paid income and be a gift from them to their children. This gift would be tax exempt for the receivers (i.e., the children). However, for tax purposes, the interest earned from such bank deposits would be clubbed with the parent’s income subject to the applicable exemption. Income of a minor child, unless earned by manual work done/ application of skill, talent or specialised knowledge and experience by the child, is generally clubbed with the income of the parent having higher income. However, if the parents are no longer married, it will be clubbed with the income of the parent maintaining the child.
However, a variant to the one above does not have the same implications. For example, let us assume that working children gift money to their parents and that gift money is either invested in bank FD or mutual fund investments in the name of the parents. The interest earned from that bank FD or capital gains from mutual fund investments will not be taxable in the hands of the children. Rather, it will be considered as income of the parents. Thus, in this scenario there will be no tax-implication on the giver, i.e., working children.
In order to ensure that genuine cases of gifting do not get covered under the above situations and be taxed unjustly, it will be prudent to maintain sufficient documentation (such as gift deeds etc.) of the gifts given/ received. It is also essential for individuals to evaluate their transactions to check if they fall under any of the taxable scenarios covered above. If yes, they should voluntarily disclose the income in their individual income-tax returns as appropriate, to ensure compliance.
(Amarpal S. Chadha, Partner and India Mobility leader, EY India, Contribution by Sreenivasulu Reddy, Director, People Advisory Services, EY India)
(Views expressed are personal.)