Gifts and Their Tax Implications

In India, exchanging gifts is a common way to express love and gratitude within our culture. These gifts can range from items of nominal value to high-value assets such as stocks, jewellery, and real estate property. However, it is essential to understand the tax implications of gifts under the Income Tax Act.

In this blog, we will simplify the relevant provisions related to gifts.

What is Gift as per Income Tax Act?

As per section Section 56(2)(x) of the Income Tax Act, any money, or property transferred from one person to another without consideration is known as gift.Value of gifts above specified thresholds are taxed under the head ‘Income from other sources’.

Understanding Tax on Gifts

Gifts are classified into two categories i.e. taxable and non-taxable gifts: 

• Non-Taxable Gifts: 

• Gifts received from relatives as defined in the act such as spouse, siblings, parents, grandparents, and even in-laws are exempt from tax.
• Gifts received on wedding occasions, via inheritance, or as part of a will are exempt from tax, provided they do not exceed ₹50,000 in aggregate from a non-relative in a financial year.
• Gifts received from certain charitable institutions, local authorities, or medical institutions which qualifies for deductions are also exempt from tax.

• Taxable Gifts:

• Gifts received from non-relatives, exceeding ₹50,000 in a financial year, are taxable.
• Immovable property received without consideration is taxable if the value of stamp duty exceeds ₹50,000.
• If immovable property is purchased at a value that is significantly lower than the stamp duty value (with a difference exceeding ₹50,000 or 10% of the consideration, whichever is higher), the excess value is taxable.

Valuation and Reporting of Gifts

Taxability of gifts depends upon their fair market value at the time of receipt.

• If gift is in the form of immovable property then stamp duty value is considered for taxation.
• For other assets, the fair market value is considered for taxation.

For example, if your friend gifts you a gold biscuit valued at ₹1,00,000, the entire amount will be taxable under Section 56(2)(x) because your friend is classified as a non-relative, and the value of the gift exceeds the exemption limit of ₹50,000.

Value of gift falling under the taxable category should be reported under the head ‘Income From Other Sources’ while filing your income tax return.

Case Scenario

Mr. Raj Sharma, a software engineer, and his wife Mrs. Neetu Sharma are planning a grand wedding for their daughter, Anaya. They have a large circle of friends and family who are excited to celebrate this joyous occasion. Throughout the wedding rituals, they receive several gifts, both in cash and kind.

Non-Taxable Gifts

• Gift from Relatives:
  • Anaya’s uncle, gifts her ₹1,00,000 in cash on the occasion of her wedding.
  • Tax Implication: Since the gift is received from a relative, it is exempt from tax.
• Gifts on Wedding::
  • Anaya’s friends and family members gifted her with various things, including:
    • A gold necklace valued at ₹60,000 from her grandmother.
    • A set of kitchen appliances worth ₹45,000 from her aunt.
  • Tax Implication: Gifts received on the occasion of marriage are not taxable, irrespective of the value of gift.
• Inheritance:
  • After the wedding, Mr. Sharma inherits his father’s property worth ₹80,00,000.
  • Tax Implication: Any money or property received under a will or by way of inheritance is not taxable.

Taxable Gifts

• Cash Gifts from Friends:
  • Anaya receives cash gifts totaling ₹80,000 from her friends.
  • Tax Implication: Since the total amount exceeds ₹50,000 and is not from relatives, this entire sum is taxable as ‘Income from Other Sources’.
• Immovable Property:
  • Anaya receives a plot of land valued at ₹7,50,000 as a gift from a family friend. The stamp duty value of the land is also ₹55,000.
  • Tax Implication: Since the stamp duty value exceeds ₹50,000 and the gift is not from a relative, the entire value of ₹55,000 is taxable.
• Movable Property:
  • Mr. Sharma receives a luxury watch from his colleague, valued at ₹1,20,000, but Mr. Mehta declares it was worth ₹1,50,000 at the time of gifting.
  • Tax Implication: The fair market value of the watch exceeds ₹50,000, the entire amount is taxable.

Conclusion

Understanding the tax implications of gifts is essential for effective financial planning and avoiding unforeseen tax liabilities. Be sure to maintain records of the gifts received and their valuations to ensure accurate reporting when filing your Income Tax Return (ITR).

A qualified financial advisor can assist you in comprehending the tax provisions related to gifts and help you with correct reporting and filing procedures. To optimise your taxes, download the 1 Finance app and book a consultation with a qualified financial advisor for a seamless, hassle-free tax planning experience.