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Taxation of Gifts in India 2021

Today, I will discuss about a case which revolved around on Taxation of Gifts in India 2021.

One of my clients reached out to me with the following query - I want to gift 5 lakhs from my tax paid income to my younger brother out of love and affection. Will my brother have to also pay income tax on it once received? How much maximum money can I gift to him per year? Also, do we need to register a gift deed to show this transfer?

For this, one needs to first understand the law around Gifts in India

TAXATION OF GIFTS IN INDIA

Earlier Law (Till October 1, 1998) – Gift Tax Act, 1958

  • Till October 1998, there was a Gift Tax Act in India named as Gift Tax Act, 1958.
  • As per this Act, Gifts (in the form of cash, draft, cheque etc.) exceeding Rs 50,000/- were taxable.
  • As per this Gift Tax Act, the tax rate was @30% on the Gifts.
  • Gifts between blood relatives were not taxable.

Present Law – Income Tax Act, 1961

  • Now, wef April 1, 2005, Taxation on Gifts has been levied under the Income Tax Act.
  • As per the provisions of section 56(2)(x) of the Income Tax Act, Gifts received are taxable in the hands of recipient under the head ‘Income From Other Sources’.
  • Gift means any Sum of Money; Moveable Property or Immovable Property, which received without consideration or inadequate consideration.
  • Gifts received upto Rs 50,000/- are not taxable under these provisions. Hence, If Gift exceed Rs 50,000 then it is taxable.
  • Property is defined to include Land and Building, Shares, Jewellery, Archaeological Collection, Drawings, Paintings, Scuplture, Any Work of Art, Bullion.
  • In case of immovable property, Stamp Duty Value (adopted by Govt for stamp duty purposes) shall be considered as consideration and accordingly Gift amount shall be calculated. Eg if an immovable property, which has Stamp Duty Value of Rs 50 Lakh, is transferred for nil consideration then 50 Lakh Rs shall be considered as Gift amount. If any consideration is received then amount after reducing the consideration amount shall be the amount of Gift.
  • For the purposes of Gift Taxation of Immovable Property, a difference of 5% between Stamp Duty
  • Value and Actual Considertion shall be ignored (amendment wef AY 2019-20).

Exemption – Not Taxable Gifts

Following transactions are not taxable under the provision of section 56(2)(x) of the Income Tax Act. Hence, gifts received in following cases are exempt:

  1. From any relative
  2. Gifts received on the occasion of marriage of an individual even from non-relatives are not an income
  3. Under a Will or by way of inheritance
  4. In contemplation of death of payer
  5. From local authority as defined in Explanation to section 10(20)
  6. Educational or medical institution or fund etc. referred to u/s. 10(23C)
  7. Trust or institution registered u/s. 12AA
  8. By any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10; or
  9. By way of transaction not regarded as transfer under clause (i) or 11[clause (iv) or clause (v) or] clause (vi) or clause (via) or clause (viaa) or clause (vib) or clause (vic) or clause (vica) or clause (vicb) or clause (vid) or clause (vii) of section 47; or
  10. From an individual by a trust created or established solely for the benefit of relative of the individual.

The term “relatives” include the following:

i. Spouse of the individual

ii. Brother or sister of the individual

iii. Brother or sister of the spouse of the individual

iv. Brother or sister of either of the parents of the individual

v. Any lineal ascendant or descendant of the individual

vi. Any lineal ascendant or descendant of the spouse of the individual

vii. Spouse of the person referred to in clauses (ii) to (vi).

viii. In case of a Hindu undivided family, any member thereof;

Conclusion

Hence, gift of Rs. 5 lakhs to the brother shall NOT be taxable in his hands. There is NO maximum limit for the gift. It is better to document the gift by way of a gift deed to substantiate the transaction in future.

DISCLAIMER

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