How are Gifts Taxed?

India is a country of close knitted families and having a lot of reasons to celebrate owing to its diversified culture, customs and religion. Numerous occasions arise where gifts are exchanged. In fact gifting each other is a symbol of love and affection and can also be a symbol of social status. However, many a times gifts can also be a part of tax planning / tax evasion. While tax planning done within the framework of law is permissible, tax evasion is prohibited and can be penalised.

The Government introduced gift tax in April 1958 regulated by Gift Tax Act, 1958 (The GTA) with an objective to impose taxes on giving and receiving gifts under certain specific circumstances. Gifts in the form of cash, demand draft, bank cheques or anything having a value were covered. However, the GTA was abolished in October 1998 and made all gifts tax free. But, Gift Tax was reintroduced in a new form and included in the Income tax provisions in 2004.

It is highly important to have a basic understanding of taxation on gifts in India to avoid any ignorant /unplanned tax outflow.

1. Gift taxation in India

As per the law as it stands today which was amended in 2017, gift received by any person by any person or persons are taxed in the hands of recipient under the head ‘Income from other sources’ at normal tax rates. We have discussed below what kind of gifts are covered and its quantum to be taxed.

The provisions relating to gift tax have been dealt with under Section 56(2)(x) of the Income-tax Act, 1961. These provisions have been briefly captured in the form of the table below:

*Value adopted by stamp duty authority for the purpose of stamp duty

2. Provisions relating to Stamp Duty

Provisions relating to considering the stamp duty value is similar to the provisions as per Section 50C.  We have discussed the provision for the purpose of gift tax in brief below:

For the purpose of computing gift tax in case of immovable property, stamp duty value is what needs to be considered. However, stamp duty value can be higher due to varied reasons and one of such reason can be considerable time gap between agreement fixing the consideration and date of registration. Therefore, for the purpose of gift tax, stamp duty value as on the date of agreement fixing the consideration need to be considered if the following conditions are satisfied:

• Date of such agreement and the date of registration are different; and
• Consideration either fully or in part is paid by way of an account payee cheque or bank draft or by using electronic mode of transfer through bank account on or before the date of agreement for transfer

Further, in case the taxpayer has questioned or disputed the stamp duty value adopted by stamp duty valuation authority as per Section 50C, tax officer is required to refer the valuation to a valuation officer (VO) and the VO is required to call for records and give an opportunity of being heard to taxpayer and pass an order in writing of value he has arrived. For the purpose of gift tax, lower of stamp duty value or value arrived by VO is required to be adopted.

3. Exemptions from gift tax

As mentioned above, certain specified gifts received by any person from any person/persons attracts gift tax. However, here are some exceptions to this.

General caution

Due to extensive tax planning using gifts, gifts in India generally fall under the scrutiny of the tax department, especially if the quantum is huge. Hence, it may be advisable to maintain documentation to establish genuineness of gift received and sufficient source of funds with the donor to justify the gift.