Know how your gifts are taxed before it becomes a burden

Gifts, whether received directly or as a surprise from family and friends, always bring joy and happiness into your life. However, only few are aware that the same gift might also qualify as a tax invasion if the gift exceeds a specific threshold and the associated tax is not paid.

India’s legislative system for taxing gifts has experienced a sea change. The Gift Tax Act, which was adopted in 1958, was repealed in 1998, and as a result, both giver and receiver of gifts were no longer required to pay taxes on gifts received or given.

Following that, the absence of a gift tax statute resulted in a slew of lawsuits involving the fake capital formation and money laundering. However, with that, section 56(2)(v) was introduced under the Finance Act 2004 for taxing gifts only in the hands of the receiver.

As per the current law, which was revised in 2017, mentions gift received by any person or individuals are taxed at the recipient’s normal tax rate under the heading ‘Income from other sources.’

Let’s take a look at what kind of gifts are exempt and how much they are taxed

> Today, any gifts received in whatever form, such as cash, cheque, draft, movable property, or immovable property that exceed Rs 50,000 are fully taxable in the recipient’s hands.

> For instance, if you get a gift worth Rs 80,000 during a tax year, you must pay tax on the entire amount. However, if the total worth of your presents is less than Rs 50,000, you will be exempt from paying tax.

> However, gifts of any value received from relatives (such as spouse, parents, in-laws, etc.) mentioned in the law are exempt, while the same is true for gifts received from non-relatives (excluding employer) only if received on a defined special occasion of marriage, etc.

> A relative for this purpose is defined as brother/sister, son/daughter, and any of the individual’s lineal descendants or ascendants, as well as his or her spouse. A parent who gives his son or daughter Rs 85,000 or a plot of land is tax-exempt. However, a gift of up to Rs 85,000 from a friend or colleague is taxed. In short, gifts received from non-specified families or acquaintances are taxable.

What kind of gifts falls under the tax category?

> Money received from anyone on the occasion of an individual’s marriage is not taxable. However, the money received in excess of Rs 50,000 during the year on birthdays, anniversaries, and festivals are taxable.

> For example, if a friend gives you Rs 30,000 on your birthday, a co-worker gives you Rs 40,000, and a relative gives you Rs 25,000, the whole amount of Rs 95,000 is taxable, as the aggregate amount exceeds the threshold limit. However, if the same money is for a wedding rather than a birthday, the entire money is tax-free in the hands of an individual.

> Employer-provided gifts up to Rs 5,000 per year are tax-exempt. For instance, if an employee receives Rs 20,000 as a present from his employer, Rs 15,000 is taxed.

> In case of gifting any immovable property like land or building, which is received without monetary consideration, usually needs to be registered and taxes are expected to be paid in certain cases. The recipient would be required to pay income tax if the stamp duty value of such property is above Rs 50,000.

> However, any immovable property is received for a consideration that is less than its stamp duty value by an amount exceeding Rs 50,000 or 5% of the consideration, whichever is higher, such excess amount shall be taxable as gift in the year of receipt.

It is always critical to keep track of gifts received as well as proof of the assets you own in the form of gifts. This would ensure that what is taxed and what is not will be clearly defined. A gift is nothing more than a source of joy; it should not become a source of stress. Understanding how gifts are taxed in India teaches the recipient to accept the responsibility of paying tax.