In India, we express our love and affection through gifts. We often hear of cars being gifted and homes being given to family members. But do these gifts turn taxable after a limit? Do your elders need to pay gift tax before presenting them?
In this guide by H&R Block we will understand what gift tax is and how it is levied.
The tax levied on the gifts that you have received in money or its worth and which is over and above a certain set limit by the Indian law is known as gift tax. Income tax on gifts helps regulate the gives which is given to you by a person who is not a close relative as per the definition of Income Tax Law of India. These gifts include tangible, intangible, movable and immovable assets which can be given voluntarily and without considering it in money or it’s worth. There are, however, some gifts which are exempt from taxes.
As per the Income Tax (1) Act, 1961, if the value of gifts received, is more than Rs. 50,000 a year, then such amount is taxed as income in the hands of the receiver. These gifts may be in any form – cash, jewellery, movable and immovable property, shares etc.
However, this rule is not applicable if your relatives present the gifts. Now just to escape gift tax in India you can’t call a person your relative saying he is the son of my uncle’s neighbour’s vendor’s sister! To avoid scenarios like these, the income tax rules specify relatives from whom tax-free gifts can be received. These are:
Also, the gifts can be exempt even if they aren’t received from these relatives, if they are received during your marriage. So, stop fretting about the Income Tax Department questioning you about the car that was gifted by a distant relative at your wedding. But ensure that the date mentioned on the gift deed is of your marriage day or at least close to that date.
Just like marriages, there is no tax implication of gifts received as a result of inheritance. If the gifts come to you by way of a will then you aren’t supposed to pay any tax on the amount. However, the income generated later say by way of rent on a house inherited by you would be taxable (2).
You need not include the amount you got from local authorities or educational institutions as gifts for your good deeds or on the basis of merit.
However, if the amount of gifts received on occasions other than the above and from a person who isn’t a relative as specified exceeds Rs. 50,000, then the entire amount would be added to your income. So, don’t make the mistake of adding just Rs. 10,000 to your income, if a friend gifts you Rs. 60,000 for helping his parents.
Always get the documentation done when there is an exchange of big gifts and note the occasion on the document. It would be easier to convince an assessing officer at the time of tax scrutiny (3) if the written proofs are ready.
Here is nice chart in the form of an infographic which will help you easily understand taxability of gifts, exemptions and other rules. Please click on the below image to see the full infographic.
When you give gift to someone, it is essential to back it up using gift deed. A gift deed is a legal document which is used to describe the transfer of gift from giver to receiver without any exchange of money.
A Gift Deed should include the following:
Stamp duty of recommended value has to be paid for registration of Gift Deed. The Stamp duty charges differ from state to state and also based on gender. Few states offer a concession in stamp duty if the property is gifted to family members.
Any gift received by an employee from his employer is a perquisite. Perquisites are nothing but a benefit that an employee receives from his employer other than salary or wages due to the office or position he holds as a result of his employment.
So during a Financial Year, aggregate value of all the gifts or vouchers received by the employee if found to be equal or less than Rs. 5,000 then it is exempt from tax.
If a husband gifts anything to his wife without adequate consideration then it is taxable in the hands of husband. The gift is clubbed with husband’s income. Similarly, any gift from wife to husband in the absence of adequate consideration is taxable in the hands of wife due to clubbing provisions.
Any income generated from such gift is also taxable in the hands of giver. For example, if you gift bank FD to your spouse then interest income generated above Rs. 10,000 is taxable in your hands.
Let’s suppose your parents are retired and they do not have any source of income or their income is below the taxability limit. In this case, you can gift them a good amount of cash which they can invest in high-return instruments such as senior citizen’s savings scheme.
As any income (other than the manual work done by him; or through any activity involving application of his skill, talent or specialized knowledge and experience derived by minor child) gets clubbed in the hands of the parent having higher taxable income, therefore gifting the amount to minor children may not help the tax situation.
If you have any close family member (covered relative) who fall in nil or lower tax bracket then you can save significant taxes by gifting/transferring your investment in their name. But do consider other factors such as succession issues before you transfer anything to your relative just for tax saving (4).
If you gift anything to your daughter-in-law without adequate consideration then any income derived by her out of the gifted amount/property will be clubbed in your hands.
A. You can gift money to your parents if they are retired, and they can invest it in some high return investment scheme and save taxes. Clubbing provision cannot be applied here since they are non-earning individuals.
A. Any gift that is given to an employee by the employer is known as a perquisite. Perquisites include food coupons, award money, etc. If the gift money is more that Rs 5,000 it will be taxable, otherwise it is free.
A. Any amount of gift given to your non-earning spouse or child is tax-free. However, if they earn some income from that gifted amount, it will be clubbed with your income, and you will have to pay taxes on the total income.
A. A lot of people gift flats to their spouse for saving taxes. Here, if your spouse has no other source of income, the rental income will be clubbed with your income, and you will have to pay taxes on the total income amount. However, if your spouse has any other source of income, the rental income will be added to that income and will be taxed accordingly.
A. There is no separate gift tax rate in India. The amount of gift is usually clubbed with your current income, and then you need to pay taxes as per your slab rate.
A. Gifts given by individuals who do not fall under the ‘relatives’ definition of the Income Tax Law is chargeable to tax. If the amount of money or its worth gifted exceeds Rs 50,000, the whole amount will be taxable. In this case, Rs 90,000 will be charged to tax.
Caution: Always get the documentation done when there is an exchange of big gifts and note the occasion on the document. It would be easier to convince an assessing officer at the time of tax scrutiny if the written proofs are ready.
Consult your chartered accountant on the tax liability due to investing money received as gifts. Rules related to clubbing of income would apply on certain instances thereby increasing the tax liability.