World over, we express our love and affection through gifts. Brothers to sisters and Parents gift their children on various occasion, especially during marriage. Grandchildren too receive gifts from grandparents. The question that arises is are these gifts taxable? If so are there ways to minimize tax incidence on such gifts? Let’s analyze the matter at hand.
Table of Content
- How are gifts are taxed in India?
- Applicable Tax rates on gifts
- Gift Deed Documentation
- Stamp duty on gift deed
- Gifts and tax Planning
1. How are gifts taxed in India?
As per Section 56(2) of the Income Tax Act, 1961 if the value of gifts received is more than Rs. 50,000 a year, then such amount is taxed as income in the hands of the receiver. Gifts can take any form like cash, jewelry, movable and immovable property, shares etc.
An exception to this rule is if a relative present the gifts. Relatives are defined as:
- Parents
- Spouse
- Your and your spouse’s brothers and sisters
- Brothers and sisters of your parents
- Your lineal descendants (including spouses)
- Lineal descendants (including spouses) of your spouse
Another exemption is if the gift is during your marriage. One needs to ensure that the date mentioned on the gift deed is of the marriage date or at reasonably close.
Just like marriages, there is no tax implication of gifts received as a result of inheritance. If the gifts come to you by way of a will then you aren’t supposed to pay any tax on the amount. Subsequently income earned from such gift is taxable in the hands of the recipient. For example, if one receives shares as an inheritance and subsequently sells the same, the difference between the cost price and its sale price is taxed.
Another exception is an amount one receives from local authorities or educational institutions as gifts for your good deeds or on the basis of merit.
However, if the amount in terms of gift exceeds Rs. 50,000, then the entire amount would be added as income. For example, if one receives a gifts of Rs. 60,000 then the whole amount is taxable not just Rs. 10,000 which is Rs. 60,000 less Rs. 50,000.
2. Applicable Tax Rates on gifts
- Gift Tax Act was abolished in 1998.
- The cash or cheque amount, stamp duty value of property and estimated value of other assets will be chargeable as income.
- One will have to report gift value under the “Income from Other Sources”.
- This gift income will be taxed along with the total income as per the prevalent tax slabs applicable in an individual case for the year in which the gift is received.
3. Gift deed Documentation
As discussed above every gift deed should be backed up with a gift deed which is a a legal document used to describe the transfer of gift from the donor to the recipient without any exchange of money.
A Gift Deed should include the following:
- Date and place where Gift Deed is made
- Details of the donor (name, father’s name, date of birth, address)
- Details of the recipient (name, father’s name, date of birth, address, relationship with donor)
- Relationship between the donor and recipient
- Details of the property that is being gifted
- Signatures of donor and recipient
- Details of two witnesses in whose presence the deed was executed
- Signatures of the witnesses
4. Stamp duty on gift
Stamp duty of recommended value has to be paid for registration of Gift Deed. The Stamp duty charges differ from state to state. Few states offer a concession in stamp duty if the property is gifted to family members.
5. Gifts and tax planning
One can use the provisions of the law to plan minimizing the liability of taxes of exchange of gift. Given below are some of the ways this could be achieved.
Taxability of gifts to employees in India
Any gift received by an employee from his employer is a taxed in the hands of the employee as a perquisite. So during a Financial Year, aggregate value of all the gifts or vouchers received by the employee if found to be equal or less than Rs. 5,000 then the same is exempt from tax.
How to gift money to wife to save tax?
If a husband gifts anything to his wife without adequate consideration then it is taxable in the hands of husband. The gift is clubbed with husband’s income. Similarly, any gift from wife to husband in the absence of adequate consideration is taxable in the hands of wife under the clubbing provisions of the Income tax act.
Any further income generated from such gift is also taxable in the hands of giver. For example, if you gift bank FD to your spouse then interest income generated above Rs. 10,000 is taxable in your hands.
Save tax by gifting money to parents?
Gifting is an ideal too for tax planning, where the parents are retired and they do not have any source of income or their income is below the taxability limit. In such, one gift them cash which they can invest in high-return instruments such as senior citizen’s savings scheme.
Taxability of gifts from parent to child
As any income (other than the manual work done by him; or through any activity involving application of his skill, talent or specialized knowledge and experience derived by minor child) gets clubbed in the hands of the parent having higher taxable income, therefore gifting the amount to minor children may not help the tax situation.
Word of Caution: Wherever there is an exchange of gift get the documentation done. This document would be very handy in case the matter comes up before the tax Authorities. Consult your chartered accountant on the tax liability due to investing money received as gifts. Rules related to clubbing of income would apply in certain instances thereby increasing the tax liability.
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