Gift tax in India

How annoying would it be if you gave your best friend a car for her birthday and then found out that she was liable to pay tax on it? Yes, this is a typical case where you’d start pulling your hair out and run to your Chartered Accountant. Well, don’t let that happen to you and know what you need to about gift tax in India before you put someone else under the Income Tax department’s watch.

Gift tax – A thing of the past

The gift tax or the Gift Tax Act came to an end from FY 04-05 in lieu of which a new provision was inserted in the Income Tax Act (1962) under section 56 (2).

What’s new with Gift Taxes?

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?

This is what you were waiting for, weren’t you? To address this issue, let’s look at certain ‘exceptions’ that prevail under the new law.

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:

Your spouse
Your brother or sister
Your spouse’s brother and sister
Your spouse’s parent’s brother or sister
Your linear ascendant or descendant
Your spouse’s liner ascendant or descendant
Spouses of persons referred in (e) and (f)

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.

There you have it. All the dope on gift tax, or shall we say tax for gifts that you need. Should you have a complicated case or a situation, best is to consult your local Chartered Accountant.

Don’t assume. Be safe – gifting is no joke!