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Gift Tax

Gift Tax in India

Gift tax is history, or rather, was history. Financial act 1998 had deleted gift tax act w.e.f.1.10.98. Consequently, all gifts made on or after 1.10.98 are free from gift tax. Neither the donor nor the donee would have to pay any tax. Financial act 2004 has revived it partially, but it is in the form of donee-based income tax instead gift.

Cash gifts up to Rs. 50,000 were tax free and any gifts in excess of Rs. 50,000 were subject to tax entirely. This was the case previously. The new laws state that gifts, whether in cash or kind, which exceed Rs. 50,000 will be taxed as ‘income from other sources’ u/s 56 (2) of the Income Tax Act in the hands of the recipient. This provision also applies to movable or immovable property that has been purchased for inadequate payment.

What are the exceptions for Gift Taxes?

For starters, this rule will not apply if you have received a gift from a relative. For the purpose of this law, a relative is:

1. Your spouse
2. Your brother or sister
3. Your spouse’s brother and sister
4. Your spouse’s parent’s brother or sister
5. Your linear ascendant or descendant
6. Your spouse’s liner ascendant or descendant
7. Spouses of persons referred in (5) and (6)

Secondly, you are looking at tax free gifts if they have been given to you in any of these occasions:

• On your marriage
• Inheritance via will
• Gift from local authority
• Gift from registered public charitable trust/institution
• Gift from a fund, trust, university or any institution referred to in the relevant section

What to watch out for?

Remember that the new law applies to movable or immovable property that has been purchased with inadequate compensation. So, plan ahead before you purchase that new property which is about to go under the hammer. If you are going to pay a sum substantially less than the state government’s rate, you as a buyer will be liable to tax.

• If your children who are minors receive gifts, it will be clubbed with your income.
• If you give a gift to your spouse, it will be tax free in their hands. However, if an income is earned from the gift, it will be taxable in your hands.
• If you are receiving a gift which you think may have income tax repercussions, it is in your interest to get a ‘gift deed’ signed by the donor. This will save you a lot of pain in the back side when the Income Tax department comes knocking on your door.

The clubbing provisions in the Income Tax Act 1961 and Wealth Tax Act, 1957 are not deleted. Therefore, income and wealth from assets transferred directly or indirectly without adequate consideration to minor children, the spouse (otherwise than in connection with an agreement to live apart) or daughter-in-law will continue to be deemed income and wealth of the transferor. Same is the case when assets are held by a person or an Association of Persons for benefit of assesses, the spouse, daughter-in-law and minor children.

Gift tax was not applicable to gifts of movable property situated in Jammu and Kashmir. Now, that the Gift Tax Act, 1958 is abolished, the clubbing provisions would be applicable to gifts of movable properties in J&K also.

Gifts are Taxable Only in the Case of Individuals and HUFs

U/s 56(2) (vi) certain gifts are taxable according to income tax as “income from other sources”. However, this provision applies only for individuals & Hindu Undivided Families (HUFs). Thus, if gift is received by any Trust or A.O.P., then it shall not be liable to income tax as “income from other sources”.

The last thing that you want to think of while receiving a gift is about the tax implications of it. The Gift Tax has had a bit of a roller-coaster ride in India; with a brief period when it was abolished and then it getting renewed in a new avatar.

Conclusion

The tightening of the rules related to gift tax will curb money laundering to a great extent. However it does protect genuine gifts from relatives and loved ones. Several guises used earlier to cover up transactions as gifts are now taxable.