Gifting is a relatively standard approach to personal and financial planning, allowing people to pass on affluence toward family members or friends or charitable organisations. In India, however, the Income Tax Act of 1961 imposes taxes on gifts to prevent tax evasion and ensure that such transfers of money are transparent if someone claims under the above acts. Therefore, understanding the implications of gifting in the taxation arena becomes paramount to prevent further liabilities and guard against legal action.
In India, any gift, either in cash, property, or other assets, is chargeable to tax under specific provisions if the total value exceeds ₹50,000 in a financial year. However, there are some exemptions; gifts to certain relatives, gifts on certain occasions such as marriage, or gifts received under the Law of Inheritance are non-taxable. Moreover, donations to registered charitable institutions are ordinarily available for tax deduction under Section 80G.
High net worth individuals can take advantage of gifting as a wealth management and estate planning tool to minimise tax liabilities. Given the extensive scrutiny of financial transactions, donations need to be properly documented to limit tax risks. Tax planning for the gifted and the successor would need to be cognizant of the prevailing laws and expert advice assisting in actualising financial planning without contravention of law.
What is a ‘GIFT’ Under Income Tax Act 1961?
According to the Income Tax Act, 1961, a ‘gift’ is money or an asset, movable or immovable, that is provided to a person or a Hindu Undivided Family (HUF) without consideration in return for it. It is, therefore, not taxable per se but falls into the ambit of Section 56(2)(x) of the Act, by which gifts are generally taxable in the hands of the donee.
Types of Gifts:
- Monetary gifts such as cash, bank transfers, or cheques.
- Your movable properties are things like shares, securities, diamond jewelry, and paintings.
- Immovable property includes land, buildings, and other real property.
Gifts in excess of the above-stated limits are liable to be shown in the Income Tax Return for tax computations. Fine documentation in terms of the deed of gift and statement should be maintained so that there can be no questions raised by income tax officers or have knowledge of such law that can help people in transferring wealth in an efficient manner in terms of taxes without triggering a sudden liability.
When are Gifts Exempt From Tax?
Any gift in excess of ₹50,000 is usually subject to tax during a particular financial year, Section 56(2)(x) of the Income Tax Act, 1961. The law also mentions certain exceptions, providing that these specific gifts may be untaxed in the hands of the recipient.
1. Gifts from Relatives (Full Exemption)
Gifts from specified relatives are taxable, irrespective of value. The Income Tax Act defines “relative” as:
- Spouse (husband or wife)
- Parents (mother and father)
- Brothers and sisters
- Sons and daughters
- Grandfather and grandmother
- Grandson and granddaughter
- Brothers and sisters-in-law, fathers and mothers-in-law
- Direct descendants of the individual and their spouses
For example, if a father gifts ₹10 lakhs to his daughter, it will not attract any tax in the daughter’s hands; however, if an uncle gifts the same amount, it will be taxable for the uncle, who is not a “relative” in this definition.
2. Gifts Received on Special Occasions
Certain gifts received on specific occasions will be exempt from taxation:
Gifts offered during weddings will be exempt from tax, while gifts at every stage will remain exempt, irrespective of their value or source. So, cash, jewelry, real estate, or shares can all be taxable gifts.
So, a monetary gift of ₹2 lakh offered to a friend of the couple by the friend is not taxable for the couple. It is also important to note that this exemption is only availed by the persons getting married, and not by their family or guests.
3. Inherited Gifts or Bequests
All inheritance from deceased persons is free from tax. Both legal heirs and nominated beneficiaries inherit such gifts and legacies. For example, if the father bequeaths ₹50 lakh to his son in his will, the son incurs no tax liability on the bequeathed amount.
4. Gifts from Charity or Religion
The gift from charitable trusts, religious bodies, or local authorities is not taxable. These may be used to deduce amounts paid to registered charities according to Section 80G. For instance, a temple giving ₹5 lakh to a devotee will not require that person to pay taxes, as the temple is a registered religious entity.
5. Gifts by Employers (Under Some Circumstances)
Gifts from an employer extend to ₹5,000 every year in accordance with the prerequisite rules of tax exemption. Any gift that exceeds this amount goes to make the entire sum taxable salary income. For example, if an employer provides a gold coin valued at ₹4,500 as a Diwali gift to an employee, this will not be liable for tax. Gifts over M10,000 will be categorised as income from salary and are taxable.
6. Gifts Made in Anticipation of Death
A person makes a transfer of property, money or assets at a time when illness or accident has made death imminent. This will not be taxed at all. For example, if a father suffering from a terminal illness transmits the properties to his son before dying, this will be tax-exempt.
Tax on Cash Gifts or Gifting Money
Monetary gifts and cash transfers are pretty much a way of life in India for weddings, birthdays, festivals, and also just for giving away money to family members. Section 56(2)(x) in the Indian Income Tax Act of 1961 states any cash gift above a certain amount actually becomes taxable for the recipient, so it is important to learn about these tax regulations to avoid nasty surprises.
In fact, if the aggregate value of the cash received as gifts exceeds ₹50,000 during the financial year, the excess amount becomes “Income from Other Sources,” making it taxable for the recipient. The income gets calculated as per the applicable income tax slab of the concerned person. For instance, if a person receives a gift of cash amounting to ₹70,000 from a friend, ₹20,000 in excess of entitlement, i.e., ₹70,000- ₹50,000, will comply inside his taxable income and get taxed at the applicable rate.
Some cash gifts are exempt from tax provided certain conditions are met:
Cash Gifts from Specified Relatives Are Totally Tax-Free
The below-mentioned relatives give cash gifts to the individual. These gifts shall be tax-exempt for any amount:
- Parents (both mother and father)
- Spouse (husband or wife)
- Sibling (brother and sister)
- Children (son and daughter)
- Grandparents (grandfather and grandmother)
- Grandchildren (grandson and granddaughter)
- In-laws (father, mother, brother, and sister)
- Lineal descendants of the individual and their spouse
To illustrate, if a parent gifts ₹10 lakh in cash to his daughter, this will not be taxable. In contrast, if a friend gives ₹10 lakh, the entire amount will be subjected to tax.
Monetary Gifts on Special Occasions
Monetary gifts made on specific occasions are exempted from tax, even if the donor is a nonrelative. These occasions include:
- Cash gifts received on the day of the marriage are completely exempt from tax, irrespective of the amount and source. Cash gifts of ₹5 lakh from friends and colleagues received on the occasion of a marriage are exempt. This exemption is available only for the bride and groom, not for their families.
- Cash gifts from the estate of a deceased person are tax-exempt. For example, a son who receives ₹25 lakh from his deceased father’s estate will not pay any tax on it.
- Cash gifts received by registered charitable institutions, religious bodies, or government agencies are tax-free.
Tax Liabilities on the Part of the Donor (Provider of Cash Gift)
- The donor is free from direct taxes on the money extended.
- However, if the growth happens in huge amounts, affecting taxable income based on that, the income tax authorities may come up with an examination of this transaction under “Clubbing of Income.”
Gift Tax Rules for Cash Gifts Between Spouses
Cash gifts through spouses are exempt from taxes for the recipient. However, any income generated from these cash gifts is liable to taxation under the donor’s income. For example, suppose a husband gives his wife ₹10 lakh, and she puts it in a fixed deposit, returning ₹50,000, and then puts her husband’s taxable income into that amount.
Cash Gifts Documentation for Tax Purposes
In order not to trigger tax problems or scrutiny from the Income Tax Department, documentation makes everything simple.
- For substantial monetary gifts, an appropriate written and signed gift deed should exist.
- Maintain evidence of transactions for bank transfer gifts, UPI or cash gifts.
- Affidavit or Declaration: For large gifts, a declaration by the donor stating “given as a gift of no consideration” may also be useful.
How to Disclose Cash Gifts in Income Tax Returns (ITR)?
- If it is considered exempt, like almost all gifts from family members or as part of a marriage, the recipient must return it under “Exempt Income” in the ITR.
- If the cash gift is taxable, he is to include it under “Income from other sources,” and pay the tax due.
Conclusion
It is crucial to understand the income tax laws regarding monetary gifts in India; otherwise, one might be subject to unnecessary taxes. Gifts of cash above ₹50,000 from non-relatives are taxable, whereas gifts from some relatives, gifts received from marriage, inheritance, and contributions from recognized bodies are tax-free. Documentation proof is essential in maintaining transparency, for example, via a gift deed or bank transaction records. Taxable gifts must be reported by the recipient on the income tax return (ITR). These guidelines and exemptions make tax-efficient giving possible within the Indian scenario. It is usually advisable to take expert help for big transactions.
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