Taxability of Gifts under Income Tax Act

The Gift tax in India is regulated by Gift Tax Act that was constituted on April 1, 1958. It came into effect in nearly all parts of the country except Jammu and Kashmir. As per this Act 1958, all gifts exceeding Rs. 25,000, in the form of cash, draft, check or others, received from one who does not have blood relations with the recipient, were taxable.

However from October1, 2009, individuals receiving shares or jewellery, valuable artefacts, valuable drawings, paintings or sculptures or even property valued over Rs 50,000 as gifts from non-relatives, shall have to start paying tax.

Gift legally means that any transfer of movable or immovable property by one person to another person without any consideration. Income tax act unequivocally enunciated under section 56(2) (vii), that it is the receiver (donee) on whom, the tax is attracted for receiving the gift from the donor. And section 56(2)(vii) is only applicable to individual and Hindu Undivided Family, however section 56(2)(viia) has been introduced to cover even partnership firms and certain companies if they receive specified shares. There is a statutory limit for the recipient. If the recipient in the previous year, received more than 50000 will be included in his total income and taxed under the head Income from Other Sources, and the said amount shall be received on or after 1^st October 2009. As per donor is concerned the tax is not attracted under this section, but it is directed under section 47(iii), provided the property shouldn’t be gifted for inadequate consideration. The gift can be in money or property and property can be either movable or immovable property. For the purpose of this section, the term ‘property’ includes:

1. Immovable property being land or building or both
2. Shares and securities
3. Jewellery [as defined under section 2(14)(ii)]
4. Archaeological collections
5. Drawings
6. Paintings
7. Sculpture
8. Any work of art
9. Bullions (w.e.f. 1^st June, 2010)

Any gift received from a non-relative is taxable. Non-relative is a person who does not fall under the term of ‘relative’, which is defined in the subsequent part of this article. And any gift worth more than 50000 received in the previous year from a non-relative, through any mode i.e. by cash or cheque or by goods is taxable under the head income from other sources. And in case of goods received, the fair market value will be the value of gift. If the gift of goods is received with inadequate consideration then the difference between the fair market value and the consideration amount is taxable. And in case of immovable property, the stamp duty value of the same will be the value of the property. If any immovable property is received for a consideration which is less than the stamp duty value of the property by an amount exceeding 50,000, the stamp duty value of such property would be taxable. Here the term stamp duty value means, the value assessed or adopted or assessable by any authority of Central or State Government for the purposes of payment of stamp duty in respect of an immovable property.

In case of gift of an immovable property made in previous year but registered only in the subsequent year, wherein a question may arose, in which year the value of the gifted property to be charged for tax. This was decided by invoking section 123 of Transfer of Property Act read with section 47 of the Indian Registration Act saying that when the instrument of gift has been handed over by the donor to the donee and accepted by him, the former has done everything in his power to complete the donation and to make it effective. Registration does not depend upon his consent but is the act of an officer appointed by law for the purpose. The Privy Council took the view that the transaction of gift was complete on the date on which the document was executed and not on the date on which it was subsequently registered.[1]

However, there are certain exceptions to this concept, wherein tax is not attracted on the money or the value of property received under the following instances, namely:

1. Any gift received from relative
2. Gift received during marriage occasion
3. Gift by way of will or through inheritance
4. In contemplation of the death of the payer or donor, as the case may be
5. Gift from any local authority as defined in explanation to section 10(20)
6. Gift from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in section 10(23C)
7. Gift from any trust or any institution registered under section 12AA

The above mentioned instances falls outside the ambit of section 56(2) (vii)

In the above mentioned sub clause 1, any gift received from a relative is fully exempt from tax as enunciated under income tax act. This covers the gift received in any mode i.e. by cash or cheque or any goods. One is not liable to pay tax for the gift received. Here the term ‘relative’ is defined under income tax act, is as follows:

1. Spouse of the individual
2. Brother or Sister of the individual

• Brother or Sister of the spouse of the individual

1. Brother or Sister of either of the parents of the individual
2. Any lineal ascendants or descendants of the individual
3. Any lineal ascendants or descendants of the spouse of the individual.

One should note that, any gift made to his/her spouse and he/she invested the money and earns any rent or interest etc., the income earned will be clubbed in the hands of the spouse who gifted the property.

And if any gift received during the occasion of marriage is fully exempt and there is no concept of statutory limit. Any gift received during engagement is taxable, which is exempted from this exemption, as the act clearly focuses only on the marriage occasions.

Under clause (d) of the second proviso to section 56(2)(vii), any sum of money or other specified movable property received ‘in contemplation of the death of the payer’ is granted exemption from tax. It is, therefore, necessary to understand the exact import of what is meant by ‘in contemplation of death’. The requirements of a ‘gift in contemplation of death’ are laid down in section 191 of the Indian Succession Act, 1925. This section reads as follows:

“191. Property transferable by gift made in contemplation of death

.— (1) A man may dispose, by gift made in contemplation of death, of any movable property which he could dispose of by will.

(2) A gift is said to be made in contemplation of death where a man, who is ill and expects to die shortly of his illness, delivers, to another the possession of any movable property to keep as a gift in case the donor shall die of that illness.

(3) Such a gift may be resumed by the giver and shall not take effect if he recovers from the illness during which it was made; nor if he survives the person to whom it was made.”

Two important requirements laid down in this sub-section are, (i) the donor must be ill and expects to die shortly of the illness, and (ii) possession of the property should be delivered to the donee, apparently during the lifetime of the donor.

To conclude this article, it is at one point which has to be researched is that, there are equal advantages and disadvantages of taxability of gifts with compared to Gift Tax Act, 1958, wherein, in case of assessing of a gift made by the transferor will be assessed with the opinion of Gif-Tax Officer after the provisions are compiled with, which will be final, but in case of current scenario the transferor on dissatisfaction of assessing officer’s valuation can be proceeded with Valuation Officer which is covered under section 50C of Income Tax Act, 1960. There are also quite stringent provisions incorporated in 56(2)(vii) compared to the earlier law .

[1]T.V. Kalyanasundaram Pillai v.Karuppa Mooppanar AIR 1927 PC 42