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Got Gifts? Know how the Taxman calculates your tax liability

Sometimes a gift can create a tax incidence. Know about gifts and taxes in this article.

Diwali, Christmas and wedding anniversaries are occasions when gifts are usually given to relatives and friends. Gifts are an expression of love and affection and in order to avoid unwanted surprises, it is important to be aware of various provisions regarding their taxation. 

What is a gift?

Any form of money or ‘property’ received by an individual without consideration (or inadequate consideration) is a gift. For instance, if you receive any cash or cheque from a relative, it is considered as a gift. Similarly, movable or non-movable property can be a gift and refers to the following capital assets:

1) Immovable property being land or building or both

2) Shares and securities

3) Jewellery

4) Archaeological collection

5) Paintings

6) Drawings

7) Sculptures

8) Any work of art

9) Bullion

How are they taxed?

Gifts in cash

Any cash or cheque received in excess of Rs 50,000 in a financial year is taxed at the marginal rate of the recipient. For instance, if you receive cash worth Rs 20,000 in a year, it is fully exempt. However, if you received Rs 70,000 in a year, it will be taxed at 30% (excluding cess and surcharge) on the entire Rs 70,000 (Rs 21,000 that is) if you are in the highest tax bracket. It would be included under the head ‘income from other sources’ for purpose of taxes.

Gifts as immovable property

If you receive land or building as a gift, you would have to pay tax if the stamp duty value of the property exceeds Rs 50,000 and it is received without consideration. And if it is received for consideration, any difference between the consideration and the stamp duty value is considered as a taxable gift. However, such difference is taxed only if it exceeds the higher of the two - Rs 50,000 and 5% of the consideration.

For instance, if you receive a flat for a consideration of Rs 40 lakh and its stamp duty value (ready reckoner rates) is Rs 70 lakh, the difference is Rs 30 lakh. The latter exceeds higher of the below:

a. The exemption threshold of Rs 50,000 and

b. Five per cent of Rs 40 lakh i.e. Rs 2 lakh.

Hence the taxable value would be Rs 30 lakh.

Gifts as movable property

If you receive a gift in the form of jewellery or other movable property, similar rules will apply as that for immovable property. However, instead of the stamp duty value, the fair market value of the property is considered for valuation purposes, while the condition of 5 per cent of consideration is done away with.

While gifts from your uncle or grandfather are not taxable, those from your cousins, niece or step-brother will be taxed. Moreover, any income generated from the gift is taxable.

Are there any exemptions?

Following gifts are fully exempt without a limit as per IT provisions:

1. Gift received from a relative 

Regardless of the amount, a gift from a ‘relative’ is fully exempt from tax. Relatives include the following:

  • Your spouse 
  • Your brothers and sisters
  • Brothers and sisters of your spouse 
  • Brother and sisters of your parents or that of your spouse
  • Any lineal ascendants or descendants of you or your spouse

While gifts from your uncle or grandfather are not taxable, those from your cousins, niece or step-brother will be taxed. Moreover, any income generated from the gift is taxable.

For instance, if you gift Rs 1 lakh to your wife and she opens a fixed deposit and earns interest on it; such interest income will be clubbed with your income and taxed accordingly. 

2. Gift received during the occasion of marriage

3. Finally, gifts received under a will or inheritance or in contemplation of death of the donor are exempt from tax.

Things to do

Whenever you get a ‘property’ of considerable value as a gift, make a gift deed. The latter has to be signed by the donor and the donee in front of two witnesses and registered in the nearest sub-registrar office. Additionally, keep copies of the will and property papers handy for proving the inheritance. 

If you have any dispute as regards the stamp duty value, you can refer the case to a valuation officer. In such cases, the lower of stamp duty and the value arrived by the valuation officer is considered for tax purposes.

Takeaway

Exercise caution while receiving gifts and maintain appropriate records to prove the genuineness of the transaction.

 

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