The word ‘gift’ generally brings with it a feeling of reward and gratitude, without any obligation on part of the recipient. However, little does a recipient know that the gift could also have a tax incidence associated with it.
Broadly speaking, the genesis of taxing gifts in India started with the introduction of the Gift Tax Act, 1958. The Gift Tax Act followed a ‘donor based’ taxation, wherein the gifts were taxed in the hands of the donor at a flat rate of 30% with a basic exemption of Rs.30,000. The Gift Tax Act was repealed with effect from October 1998 and the donor as well as the recipient were not required to pay taxes on the gifts given / received. This was a big change in the tax regime vis-à-vis gifts.
Reintroduction of Gift Tax in the Income Tax Act, 1961
Elimination of gift tax witnessed distribution of property (both movable and immovable) and income freely, resulting in tax planning and in some cases even tax avoidance. Accordingly, to curb incidents of tax avoidance, taxation of gifts was re-introduced in the Finance Act (No.2) 2004, with effect from 1 April 2005. This time, however, the emphasis shifted from ‘donor-based’ taxation to a ‘donee-based’ taxation, i.e. the income from gift(s) became taxable in the hands of the recipient.
Over the years, the law related to taxation of gifts has undergone many changes and its scope has widened. Initially, only individuals and Hindu Undivided Families (HUFs) were covered within the ambit of taxation under the Income Tax Act vis-à-vis gifts. Today, the scope is wide enough to cover all ‘persons’ who are in receipt of specified gifts above the prescribed threshold limits.
Interestingly, for tax purposes, ‘person’ includes an individual, HUF, company, firm, an association of persons, a body of individuals, a local authority, an artificial juridical person, etc.
Taxability of gifts under the I-T Act
As per the current tax law, any person (donee / recipient) receiving a sum of money, or an immovable property or any other specified property from any other person (donor) without consideration or for an inadequate consideration i.e. less than the fair market value of the property or stamp duty value in case of an immovable property, is liable to be taxed on the value of such gift.
In the above context the ‘property’ includes immovable property being land or building or both, shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures, any work of art and bullion, etc.
Exemptions have been carved out for certain specified categories of persons / recipients from the purview of taxation from gifts. Companies under certain specified schemes of reorganization too have been exempted from the above incidence of tax.
Exemptions from taxation
Below is an illustrative list of types of receipts that are specifically exempted from qualifying as gifts and consequentially, from the incidence of tax thereon:
•Any sum of money or any property received from a specified relative on any occasion.
In the above context, it has been clarified that ‘relative’, in case of an individual shall include his/her spouse, spouse’s siblings, siblings of either of the parents of the individual, any lineal ascendant or descendant of the individual, the individual’s siblings, spouse of the individual’s siblings, any lineal ascendant or descendant of the individual’s spouse, spouse of the lineal ascendant or descendant of the spouse of the individual. In case of a HUF, relative includes any member of the HUF.
•Any sum of money or any property received from any person on the occasion of the marriage;
•Any sum of money or any property received under a will or by way of inheritance;
•Any sum of money or any property received in contemplation of death of the payer;
•Any sum of money or any property from an individual by a trust created or established solely for the benefit of relative of the individual; etc.
FEMA regulations governing gifts
It is pertinent to note that besides the income tax provisions, in case of any cross-border gifts like the ones involving non-resident Indians (NRI) or persons of Indian origin (PIO), the provisions under the Foreign Exchange Management Act, 1999 (FEMA) should also be examined.
One particular aspect that requires careful evaluation is the difference in the way ‘relative’ is defined under the Income Tax Act vis-à-vis FEMA. While the Income Tax Act exempts gifts between relatives (as mentioned above), the meaning of the term ‘relative’ under FEMA is much narrower and restricted to include spouse, father, mother, son, son’s wife, daughter, daughter’s husband, brother and sister of the individual.
To illustrate the above:
If A and B are sisters and H, the husband of B, gifts any property to A, the same would not be taxable under the Income-tax Act in the hands of the recipient. However, it would not be permitted under FEMA considering the narrow definition of the term ‘relative’.
While the principles vis-à-vis gifts are largely governed by domestic regulations, transactions with NRIs and PIOs need a more careful evaluation from a FEMA perspective. Very often ignorance of FEMA, being a specialized domain area, could lead to default in compliances which are simple to execute but have severe non-compliance consequences. Hence, while a comparison can be drawn between FEMA regulations and the Act vis-à-vis gifts’ laws, a presumption must be avoided.
Another important consideration that is often overlooked due to the ignorance of FEMA regulations is the ceiling prescribed on remittances to and from the country. It is important to be aware of the amount of remittances that can be made/ received, especially outbound, as the ceilings could pose a serious challenge to the execution/ implementation of the Gift transactions.
To elucidate, under the Liberalized Remittance Scheme (LRS) of FEMA, a resident individual can remit up to $250,000 outside India in aggregate per financial year on account of permissible current and capital account transactions which include gifts (not necessarily to a relative).
Anything not specifically permitted/amount beyond the specified limits under FEMA would require permission from the Reserve Bank of India (RBI).
Implications in overseas jurisdiction
In case of cross-border gifts, besides the tax and regulatory implications under the Indian laws, it is also important to evaluate the implications, if any, under the tax and regulatory laws in the overseas jurisdiction of the country of recipient i.e. whether the gift received would be taxable or needs to be disclosed to any authorities outside India. To sum up, while the evolution of law over the years has led to taxability of gifts, specific exemptions have been carved out to insulate genuine transactions like between the relatives, on the occasion of marriage, etc. It is important to be aware of laws and be compliant with regulations to de-risk from any exposure and implications and avoid long drawn disputes and litigations.
What is the threshold limit for monetary gifts to be considered as a taxable income for the recipient?
Monetary gifts would include gifts in cash, cheques, bank deposits, draft, etc. Any such gift would be taxable in full in the hands of the recipient if it exceeds Rs.50,000 during the financial year.
Where is taxable income from gift disclosed in the tax return?
Income from gift is included in the income reported under the head ‘income from other sources’ and forms part of the taxable income.
Pallavi Talavlikar and Sameer Shah contributed to this article.
Vikas Vasal is national leader tax–Grant Thornton India LLP. You can send your queries to firstname.lastname@example.org