It is widely known that gifts from relatives are tax-exempt. But what is not widely known at all is that gifts received even from non-relatives can also be completely exempt from income tax. Here is the complete run-down from a renowned tax expert. It is very common for people to receive gifts from friends and relatives. In some cases, gifts are also received from NRls. Let us consider the latest provisions of the Income Tax Act, 1961 regarding gifts, and analyse how individuals can achieve complete exemption from income tax in respect of the gifts during the current financial year. (The sections mentioned below refer to the Income Tax Act, 1961.)
Gifts are Taxable Only in the Case of Individuals and HUFs
Under the provisions of Section 56(2)(vi) certain gifts are liable to income tax as "income from other sources". However, this provision is applicable only for individuals and Hindu Undivided Families (HUFs). Thus, if gift is received by any Trust or A.O.P., then it is not liable to income tax as "income from other sources". The provision of taxation of gifts became applicable in respect of gifts received on or after 1.9.2004 and before 1.4.2006 if the gift money exceeded Rs. 25,000. From 1.4.2006, this amount has been increased to Rs. 50,000 so that cash gifts and gifts by cheque or bank draft from non-relatives and from non-exempted categories can be fully exempt from income tax up to Rs.. 50,000 in aggregate in one financial year.
Gifts from Relatives are Tax-Exempt
Importantly, the provisions of the aforesaid Section 56(2)(vi) applicable to the taxation of gifts in excess of Rs. 50,000 in a financial year in the aggregate are applicable for gifts received from non-relatives. Thus, any gift from relatives of any amount during the financial year is completely exempt from tax. Therefore, it's crucial to know the meaning of the expression 'relative' for this purpose. The Explanation to Section 56(2)(vi) provides that the expression "relative" means:
- Spouse of the individual;
- Brother or sister of the individual;
- Brother or sister of the spouse of the individual;
- Brother or sister of either of the parents of the individual;
- Any lineal ascendant or descendant of the individual;
- Any lineal ascendant or descendant of the spouse of the individual; and
- Spouse of the person referred to in clauses (ii) to (vi).
Gift of more than Rs. 50,000/- can be received from
below mentioned relatives without any taxes
below mentioned relatives without any taxes
- Subject to clubbing provisions applicable for Gift received from Spouse and Father-in-Law.
- The individual can receive gifts without attracting tax also from lineal ascendants and decedents of the individual other than those mentioned in the above chart.
Tax-Smart 1: Exemption for Marriage Gifts
One very happy feature of the provision of of gifts is that any gift received from any person on the occasion of the marriage of the gift's recipient would not be liable to income tax at all. There is no monetary limit attached to this exemption, which is provided by the proviso to Section 56(2)(vi). However, it is not made clear by this provision whether the gifts should have been on the exact date of marriage, or a few days before or later. Normally, it should suffice if the gift is given just on the occasion of the individual's marriage, which means either on the day of the marriage itself or a day or two before or after. Practical common sense view would prevail in such cases.
Tax-Smart-2: Tax-Exempt Gifts from Other Persons
Besides gifts received from a relative or on the occasion of an individual's marriage, the following are the other gifts which are completely exempt from tax as provided in the proviso to Section 56(2)(vi) of the I.T. Act:
1. Gift received under a Will or by way of inheritance;
2. Gift in contemplation of death of the donor;
3. Gift from any local authority;
4. Gift from any fund or foundation or university or other educational institution or hospital or any trust or any institution referred to in Section 10(23C); and
5. Gift from any trust or institution, which is registered as a public charitable trust or institution under Section 12AA.
Thus, scholarships, stipends or charities received from a charitable institution would be completely exempt from income tax in the hands of the recipients without any limit provided the trust or institution giving the charity is registered under Section 12AA. Likewise, all gifts under a Will, and all amounts received on the death of a person as a part of the inheritance are fully exempt from income tax.
Tax-Smart 3: Gifts in Kind are Tax-ExemptHere is a point which should be very carefully noted that the provisions relating to taxation of gifts from non-relatives and non-specified persons in excess of Rs. 50,000 would be liable to income tax only when the gift is a sum of money, whether in cash, by way of cheque or a bank draft. Thus, gifts in kind such as a gift of shares, gift of land, gift of house, gift of units or mutual funds, jewelery, etc. would not be liable to any income tax at all. A proper knowledge and understanding of the provisions of Section 56(2)(vi) relating to gifts is very helpful in order to get full tax-exemption in respect of gifts received during a financial year
Changes Proposed In new Budget 2009 from 01.10.2009
Individuals receiving shares, jewellery, valuable artefacts or even property valued at over Rs 50,000 as gifts from non-relatives, will have to start paying tax from October 1,2009 The budget has extended the provision to tax cash gifts in the hands of the recipient to all non-cash gifts as well. These will include shares, jewellery, archaeological collections, valuable drawings, paintings or sculptures. If the value of these assets exceeds Rs 50,000, it will be treated as income for the recipient and taxed according to his or her taxslab. Not just this. Realty deals among nonrelatives for "inadeaqute consideration" will also come under the tax net, going by the finance bill 2009. If the property is sold for a song, tax will be imposed on the difference between the state government notified rate and the purchase price. Again, the recipient will have to pay tax. For jewellery or valuable artifacts, received from a non-relative for little or no consideration, a fair market value will be arrived at to determine the tax liability in the hands of the recipient.So above Tax smart Tip3 is effective only up to 30.09.2009.and from 01..10.2009 ,gift in kind from non relative will also be considered towards 50000 Limit /pa.
Updated on 09/07/2009 after Budget 2009
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