Gift Tax: What's in a Gift?

Anil Rego

The last thing that you want to think of while receiving a gift is about the tax implications of it. The Gift Tax has had a bit of a roller-coaster ride in India; with a brief period when it was abolished and then it getting renewed in a new avatar.

Gift Tax in India

Gift tax in India is governed under the Gift Tax Act constituted on April 1, 1958. As per the Gift Act 1958, all gifts in excess of Rs. 25,000, in the form of cash (including draft / cheque), received from one who does not have blood relations with the recipient, were taxable.

However, with effect from October 1, 1998, gift tax got demolished and all the gifts made on or after the date were free from tax. But in 2004, Gift Tax was again revived partially and a new provision was introduced in the Income Tax Act 1961 under section 56 (2). According to this, 'any gifts' received by any individual or Hindu Undivided Family (HUF) in excess of Rs. 50,000 in a year would be taxable (there are exceptions to this which we will deal with subsequently).

Exemption from Gift Tax:

In the following case, the receiver will be exempt from applicable gift tax:

• The gift being given by a blood relative, irrespective of the gift value
• Immovable properties located outside the country
• Gifts received from relatives on the occasion of marriage (including gifts received by daughter-in-law from parents-in-law; but excluding gifts received by son-in-law from parents-in-law)
• Gifts received by way of a will and inheritance
• NRIs gifting parents in India from their NRE account

Defining 'Relatives'

The section goes on to define the term 'relative' to ensure that there are no loop holes which could in turn lead to some sort of money laundering. The relations who would come under the ambit include -

• Spouse of the individual
• Brother or sister of the individual
• Brother or sister of the spouse of the individual
• Brother or sister of either of the parents of the individual
• Any lineal ascendant or descendant of the individuals
• Any lineal ascendant or descendant of spouse of the individuals
• Spouse of the Brother / sister of individual or brother/ sister of spouse of individual

Gifting Minors & Realty

Even gifts received by minors will be brought within the purview of taxes by means of clubbing of income, incase of both parents having taxable income, it will be clubbed with the parent who is earning the highest.

Real estate deals done for values lower than the rates fixed by state governments / local bodies will also be taxed. Here, the tax will be levied on the difference of amount between state government's rate and purchase price. The tax needs to be paid by the buyer of the property.

An effective curb against money laundering

It was found that many individuals used the loopholes in this act, to launder money.  The key reason for bringing back Gift Tax in its latest avatar is to plug loopholes and make norms more stringent. It is clear that exchanging assets amongst relatives to evade taxes have come under control and this has also ensured that the Income tax authorities can keep tab on the movement of assets (movable / immovable).

Anil Rego is the CEO and Founder of Right Horizons .