How are Gifts Taxed? - Gift Tax Exemption Relatives List

Gifts are treated as income under the Income Tax Act. If the value of the gift exceeds certain limits, it may be taxed as “Income from Other Sources”. However, there are certain exemptions available if gifts are received from certain persons or on certain occasions. Gifts received within a value of Rs. 50,000 is always exempt. 

In this article, we’ll help you understand how gift taxation works—what types of gifts are taxable, what the thresholds are, and what exemptions might apply.

Gift Taxation in India

As per Section 56 of the Income-tax Act,1961 gifts received by any person or persons are taxed in the hands of the recipient under the head ‘Income from other sources’ at normal tax rates. We have discussed below what kind of gifts are covered and their quantum to be taxed.

Threshold Limits for Exemption and Taxability of Gifts

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

Provisions Relating to Stamp Duty

Provisions relating to considering the stamp duty value are similar to the provisions as per Section 50C.  Let us discuss the provision for the purpose of gift tax in brief below:

• For the purpose of gift tax, stamp duty value as of the date of agreement fixing the consideration needs to be considered if the following conditions are satisfied:
  • The 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 an electronic mode on or before the date of agreement for transfer.
• In case the taxpayer has questioned or disputed the stamp duty value, the tax officer is required to refer the valuation to a valuation officer (VO) as per Section 50C.The VO is required to pass an order in writing of value he has arrived. 
• For the purpose of gift tax, a lower stamp duty value or value arrived by VO is required to be adopted.
• For immovable property, where the stamp duty value of property exceeds the consideration received, then up to 10% of such consideration will be provided relaxation , and it will not be considered as income from other sources.

Tip: Whenever gifts are crossing the threshold limit, or becomes taxable, it is recommended to prepare a gift deed and document the same safely. This will be a proof for the source of the gift income, which can be used as a response against tax notices.

Exemptions - Gift Taxation

As mentioned above, certain specified gifts received by any person from any person(s) attract gift tax. However, here are some exceptions to this.

Gifts Exempt on Specified Occasions

Gifts received on the following occasions are exempt, irrespective of from whom the gift is received:

• Marriage of Individual
• Under a will or by way of inheritance
• In contemplation of death of donor or payer
• Any distribution of capital assets on total or partial partition of a HUF (only members of HUF are exempt in this case)

Gifts Exempt - Received from Specified Persons

• Relative – 
  • spouse, 
  • brother and sister of self and spouse, 
  • brother or sister of parents or parents-in-law, 
  • any lineal ascendant or descendant of self or spouse and
  • spouse of any of the relatives.
• Local authority – Panchayat, Municipality, Municipal Committee and District Board, Cantonment Board
• Any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to Section 10(23C)
• Any charitable or religious trust registered under section 12A or section 12AA

Gifts Exempt - Received by Specified Institutions

• Any fund or trust or institution or any university or other educational institution or any hospital or other medical institution established for charitable/religious/educational /philanthropic purpose and approved by the prescribed authority. 
• Trust created or established solely for the benefit of the relative of the Individual (when received from the individual concern)

Summary

A summarised table showing the above provisions is presented below:

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 the genuineness of the gift received and sufficient source of funds with the donor to justify the gift.