Taxation of Gifts: An In Depth Analysis

Clipped from: https://taxguru.in/income-tax/taxation-gifts-depth-analysis.html

In India, gifts are not just out of natural love and affection but also carry cultural aspects that our generations have followed. At times when elders gift to young ones in their family it is considered to be a form of ASHIRWAD. But the issue of gifts is something that has troubled lawmakers for a long period since as and when cases of undisclosed assets were unearthed assessee used to portray them as gifts received and hence cannot be taxed. To overcome this situation legislation was imposed to curb such practices. While the intention is to tax such receipts of gifts, at the same time prevent taxation of very small amounts of gifts as they cannot be accounted for. Further exempting gifts received from relatives and on certain occasions as it being part of our tradition. Therefore, it becomes extremely essential to understand in depth how the legislature wants the gift to be taxed what are the exemptions available and how can we effectively utilise the concessions granted by the statute to minimise our tax liability.

Before diving deep into the understanding of how gifts are taxed first let us understand how the law bifurcates the gift received into different categories based on which its taxation can be determined. So, the law classifies the gifts into-

1. Gift of Cash/Sum of money (E.g. Cash/FDs/Bank Balance)

2.  Gift of Immovable Property (E.g. Land and Building)

3. Gift of Movable Property (E.g. VDA, Jewellery, Stocks)

1. CASH

Cash Gift Received in excess of Fifty thousand Rupees is taxable. This means that if ₹ 51000 is received then the entire sum of ₹ 51,000/- is to be taxed under the head income from other sources and not just the amount in excess of ₹ 50,000/-.

This Limit of ₹ 50,000/- shall apply to the aggregate of cash gifts received from all. E.g. You receive a gift from A ₹ 20,000/- and from B ₹ 31,000/-, now in this case since the aggregate of sums received exceeds the exemption limit therefore the entire sum of ₹ 51,000/- shall be chargeable to tax under the head income from other sources.

Taxation of Gifts An In Depth Analysis

2. IMMOVABLE PROPERTY

There are two different cases in case of immovable property-

a. The first case is where the immovable property is received without consideration i.e., without paying a single rupee-

In this case, if the Stamp Duty Value (SDV) (Commonly known as the Government Value) of the property exceeds ₹ 50,000/- then the entire amount shall become taxable.

E.g. if your friend gifts you a property the stamp duty value of which is ₹ 6,00,000/-/- then the entire value of ₹ 6,00,000/-/- will be taxed under the head income from other sources

Unlike cash gifts, separate gifts of immovable property are not to be aggregated. So let’s say you received as a gift a small piece of agricultural land in the remotest area possible from your friend A having SDV of ₹ 45,000/- and from friend B having SDV of ₹ 49,000/-. Here since both these properties have SDV lower than ₹ 50,000/- and since the two separate gifts are not to be aggregated both gifts shall go untaxed.

b. The second case is where the immovable property is purchased for a consideration but the consideration is lower than the Stamp Duty value (SDV) (Commonly known as the Government Value) then in such case the difference between these two values shall be taxed under the head income from other sources if the difference is more than higher of the following-

i. ₹ 50,000/-

ii.  Ten percent of consideration paid for the purchase of such property

E.g. 1 If you buy a property the stamp duty value of which ₹ 6,00,000/-/- for ₹ 5,49,000/- then the difference of ₹ 51,000/- shall not be taxable even though it exceeds ₹ 50,000/- as it is not more than higher of (i. ₹50,000/- or ii. 10 % of ₹ 5,49,000/- i.e. ₹ 54,900).

E.g. 2 Now, if you buy a property the stamp duty value of which ₹ 6,00,000/-/- for ₹ 5,45,000/- then the difference of ₹ 55,000/- shall be taxed under the head income from other sources as more than the higher of (i. ₹50,000/- or ii. 10 % of ₹ 5,45,000/- i.e. ₹ 54,500). And here the entire amount of difference shall be taxable not just the amount of income in excess of the above two figures.

Similarly, here also separate purchases of property below SDV value shall not be aggregated to arrive at a total figure of ₹ 50,000/-. Suppose you purchase three immovable properties having SDV of ₹ 1,00,000/- each for ₹ 45,000/- – ₹ 55,000/- – ₹ 65,000/-. Out of the three properties, only the first one shall be taxed as the difference exceeds ₹ 50,000/- and 10% of consideration whereas the remaining two properties purchased for ₹ 55,000/- and ₹ 65,000/- shall go untaxed as there is no aggregation.

On the other hand where a property is sold for consideration lower than the SDV then the sale price is considered to be Stamp Duty Value instead of actual consideration if the consideration is lower than the SDV by more than the higher of the following-

iii.  ₹ 50,000/-

iv. Ten percent of consideration paid for purchase of such property

So in E.g. 2 above where ₹55,000/- is taxed in the hands of purchaser under the head income from other sources on the other hand seller will have to compute capital gain by taking sale price as ₹6,00,000/- and not ₹5,45,000/- which was the actual sales price, thus increasing the Capital Gain of seller by ₹ 65,000/-.

Further there won’t be any aggregation between the category a- i.e. received immovable property without consideration and category b- i.e. purchase of immovable property for consideration below its SDV.

3. MOVABLE PROPERTY

Like in the case of immovable property here also there are two cases – movable property received without consideration and purchase of movable property for consideration below its Fair Market Value (FMV).

It is also important to understand for the purpose of this section what is considered to be a movable property. Here is an exhaustive list of what is considered to be movable property-

(i)  shares and securities;

(ii) jewellery;

(iii)  archaeological collections;

(iv) drawings;

(v)  paintings;

(vi)  sculptures;

(vii) any work of art; or

(viii) bullion;

The definition of property now also incorporates Virtual Digital Assets (VDA) which includes Crypto Assets, Non -Fungible Tokens and other assets specified as VDA

We often use any acronym JAD PB SAS for the above list. On account of there being an exhaustive list as to what is considered to be a movable property gift of anything not covered in the list shall go completely untaxed. Suppose your friend gifts to an iPhone 14 Pro or let’s say a Mercedes Benz S Class both shall go untaxed as these are not covered by the exhaustive above.

Now let’s discuss the two cases-

A. The first case is where the movable property is received without consideration i.e., without paying a single rupee-

In this case entire if the Fair Market Value (FMV) of all movable properties received exceeds ₹ 50,000/- then the entire amount shall become taxable.

E.g. if your friend gifts you Shares of a company the FMV of which is ₹ 6,00,000/-/- then the entire value of ₹ 6,00,000/-/- will be taxed under the head income from other sources.

Unlike in the case of immovable property here, fair market value of all the movable properties received from each and every person shall be aggregated. This means if you receive a gift from a A of ₹ 20,000/- and from B of ₹ 31,000/- the entire amount of 51000 shall we taxed under the head income from other sources as it shall be aggregated

B. The second case is where the movable property is purchased for a consideration lower than its FMV in such cases if the consideration is lower than the FMV then the difference between the two shall be taxed under the head income from other sources, if the difference exceeds ₹ 50,000/-.

Here also there shall be aggregation if gifts of different purchases consideration paid is below its FMV. Lets say you purchase three movable properties having FMV of ₹ 1,00,000/- each for ₹ 45,000/- – ₹ 55,000/- – ₹ 65,000/-. Since the aggregate of difference i.e. ₹ 1,35,000/-  is more than ₹ 50,000/- the entire difference shall be taxed under the head income from other sources. In the same example if the purchase were made for ₹ 90,000/- – ₹ 85,000/- – ₹ 80,000/-, the aggregate of difference would have been  ₹ 45,000/- which lower than ₹ 50,000/- hence it shall go untaxed.

Unlike in the case of immovable properties here we do not see higher of ₹ 50,000/- or 10 % of a consideration. Here if the difference exceeds ₹ 50,000/- the entire amount gets taxed.

Even though aggregation is to be made within Category A & B but no aggregation is to be made between Categories A & B. Suppose you receive a gift having FMV of ₹ 30,000/- (Category A) and purchase a movable property having FMV of ₹ 1,00,000/- at a price of ₹55,000/- (Category B) , the entire amount shall go untaxed as we do not have to aggregate category A& B. To simply state each category gets its own threshold limit of ₹ 50,000/-.

Now there are certain instances where even if the amount of gift received exceeds the above-specified limit it shall not be taxed, some of the common instances of such receipts of gifts are illustrated below-

(I) from any relative; or

(II)  on the occasion of the marriage of the individual; or

(III) under a will or by way of inheritance; or

(IV) in contemplation of death of the payer or donor, as the case may be; or

(V) from any local authority; or

(VI) from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution; or

(VII)  from or by any trust or institution registered under 73[section 12A or section 12AA or section 12AB]; or

(VIII) from an individual by a trust created or established solely for the benefit of relative of the individual;

Who shall be relatives is also defined as under-

(i) in case of an individual—

 (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 items (B) to (F); and

 (ii) in case of a Hindu undivided family, any member thereof;

Note-These relations need to be studied carefully, in law X=Y does not necessarily mean Y=X. E.g. if Mama/Bhua gives gift to their Bhanja/Bhatija it shall be exempt but gift from Bhanja/Bhatija to Mama/Bhua shall not be exempt. Also, only real relations are to be considered for example a cousin brother/sister of self or spouse or parents are not considered to be relatives.

Now let’s discuss some special cases of –

1. Gifts given by an employer to an employee shall be taxable if the value of gifts exceeds ₹ 5,000/-. The limit of ₹ 50,000/- shall not apply to gifts received from an employer. But the value of gifts in excess of ₹ 5,000/- shall only be taxed.

2. Gifts received by an intern from his employer can be exempt u/s 10(16) if it can be said that same has been provided to meet the cost of education.

3. Gifts received by business/profession shall be completely taxable irrespective of the amount under the head income from business and profession. With the introduction of section 194R TDS is required to be deducted where the aggregate value of such benefits/perquisites exceeds ₹ 20,000/-.

4. The threshold limit of cash, immovable property and movable property is to be seen separately. So is some gifts you cash of ₹ 40,000/- and a painting worth ₹ 35,000/- , even though aggregate exceeds ₹50,000/- but since the limit in each category is not breached it shall go untaxed.

#incometax #Gift #taxationofgifts #GiftTaxation

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