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Section 56 of the Income-tax Act, 1961 (ITA)

Updated on :  

08 min read.

The Income-tax Act, 1961 (ITA) classifies sources of income under five main heads: income from salaries, income from house property, profits and gains from business or profession, capital gain, and income from other sources.

The last head is a category of residuary incomes, which are receipts of earnings that cannot be classified under any other heads of income.

Let’s gather an overview of incomes that are generally taxable under the head, ‘income from other sources’:

  • Dividends are reported under the head ‘income from other sources’ and are taxed under Section 56(2)(i) of the ITA. This is based on the residential status of the source company that paid out the dividend
  • One-time income earned from winning lotteries, crossword puzzles, and races, including horse races, card games, gambling, or betting. These incomes are chargeable to tax at a flat rate of 30% and cess at 4%
  • The amount an employer receives from his employees as a contribution towards provident fund (PF), employees’ state insurance (ESI), and superannuation fund, among others. Such an amount will be taxable if the employer does not credit the amount received from the employee towards the respective funds’ account.
  • Income received as interest on securities (Section 56(2)(id))
  • Advance money received or money received in negotiation for transfer of a capital asset (provided the money is forfeited and it doesn’t result in the transfer of such asset)
  • Income from letting out of plant, machinery, or furniture belonging to a taxpayer (Section 56(2)(ii))
  • Income from renting out machinery or furniture with buildings, where such letting is inseparable(Section 56(2)(iii))
  • Any sum received under Keyman insurance policy, including bonus (Section 56 (2)(iv))
  • As per Section 56(2)(viib) of the ITA, when a privately held company issues shares at a particular price, which is greater than Fair Market Value (FMV), tax is chargeable to the amount received in excess of FMV

Tax on Gifts Received under Section 56(2)(x)

Gifts received in the form of cash (cheque, online transfer, fixed deposit, demand draft or any other form) and cash equivalents or property (moveable or immovable) or in-kind during a financial year are taxable. As per Section 56 (2)(x) of the Income-tax Act, 1961 (ITA), you are required to pay taxes if the gift value is greater than Rs 50,000. While gifts received up to Rs 50,000 are completely tax-free, if this limit is crossed, the whole amount of gifts received becomes taxable in the hands of the recipient.

The aggregate value of gifts received during the financial year is taken into account for taxability and it is not based on individual gift. In a case where the aggregate value of gifts received during the year is greater than Rs 50,000, the aggregate value of these gifts will be charged to tax.​ For example, an individual received gifts worth Rs 15,000 on April 1, 2021, and Rs 40,000 on March 31, 2022. In this case, the entire Rs 55,000 is taxable under Section 56(2)(x), as the aggregate value of gifts exceeds Rs 50,000 during a financial year under the head ‘income from other sources’.

Similarly, a gift in cash from an employer is fully taxable in the hands of the employee under the head of salaries, as per the ITA. However, in the case of a gift received in kind, the amount is fully taxable if the value exceeds Rs 50,000.

Tax on Property Transactions under Section 56(2)(x)

Any property transaction (movable and immovable) has income tax and stamp duty implications. 

In the case of any immovable property, which could be land and building or both, received without consideration (without paying anything for it), the stamp duty value (value adopted by the authorities for payment of stamp duty) of which exceeds Rs 50,000. The full stamp duty value of such property will be taxable in the hands of the beneficiary. 

On the other hand, if the property is received for consideration and the stamp duty value of such property exceeds Rs 50,000 or 10% of the consideration, then the stamp duty value in the excess of consideration will be taxable as income in the hands of the buyer.

Note: As per the Finance Act, 2021, the rate of variation allowable between the stamp duty value and actual sale consideration value, has been raised from 10% to 20%. However, the said provision was invoked for the period  November 12, 2020, to June 30, 2021, in the case of residential properties costing up to Rs 2 crore. In other cases, the rate of variation allowed is 10% of the consideration.

Movable property such as jewellery, gold, shares, securities, archaeological collections, drawings, paintings, sculptures, any work of art, and bullion, among others, when received at a reduced price or without consideration, the aggregate FMV of which is greater than Rs 50,000, the aggregate FMV falls under the tax ambit. However, for a consideration, which is less than the aggregate fair market value of the property by an amount exceeding Rs 50,000, the entire excess fair market value will be taxable.

Exemptions under Section 56 (2)(x)

In case if a relative offers a gift, it is exempt from tax under Section 56(2)(x). According to the ITA, the following persons are considered relatives: spouse, brother/sister, brother/sister of the spouse, brother/sister of either of the parents, any blood relative/offspring, any blood relative/offspring of the spouse, spouse of the individuals referred above. For a Hindu undivided family (HUF), any member thereof.

Friends, however, are not included in the list of relatives, so any gifts received from them are taxable.

Further, gifts that a couple receives during their marriage are tax exempted. At the same time, gifts that an individual gets on occasions such as a birthday or anniversary remain taxable.​​

On the other hand, gifts received under a will or by way of inheritance and gifts received in contemplation of the death of the donor (for example, a terminally-ill person anticipating death in the near future) are also tax-free.

The income tax provision of taxation of gifts will not be applicable if any sum of money or property is received from:

  • Any local authority, as per  Section 10(20) (defines what kind of income is exempt from tax) of the ITA
  • Fund/foundation, university/other educational institution, hospital/other medical institution, and  trust/institution referred to in Section 10(23)
  • Trust/institution that is registered under Section 12A, Section 12AA or Section 12AB
  • Fund/ trust/institution, university/other educational institution and hospital/other medical institution as per Section 10(23C)
  • The transaction, which is not regarded as transfer under Section 47, or from any individual by a trust that is created/established with the sole intention to benefit the relative of the individual

Tax Relief in the Aftermath of Covid-19

The Finance Act, 2022 introduced amendments to Section 56 (2)(x) to provide tax relief to taxpayers to tide over the Covid-19 health crisis during the financial year 2019-20 and subsequent years. As per the amendment, the amount received from the employer or any well-wisher for COVID-19 treatment is tax-free. Further, money received by the family members from the employer or any other person in case of demise of a breadwinner of the family will be exempt from tax. There is no exemption limit if the money is received from the employer. But there is an exemption limit of Rs 10 lakh for money received from any other person.

Frequently Asked Questions (FAQs)

  • If a person gives a cash gift to his wife, will that be taxable under Section 56(2)(x)?

While a husband can give a cash gift to his wife, which would be exempt from tax, irrespective of the quantum under Section 56(2)(x) of the ITA, however, as per the tax laws, an individual cannot receive an amount in cash exceeding Rs 2 lakh from another person in a day and in a single transaction.

  • Income tax is levied on every individual. According to the income tax law, what falls under the ambit of income?

As the income-tax law, the word ‘income’ has a very broad and inclusive meaning. For an individual drawing a salary, anything received in cash, kind, or as a facility from an employer is regarded as income. In the case of a businessman, the net profit will be the component of income.  Also, income can be drawn from investments in the form of interest, dividends, and commission, among others. Further, an individual may earn income on the sale of capital assets like land, buildings, and gold, among others.

Income shall be computed as per the relevant provision of the Income-tax Act, 1961, which highlights specific conditions for calculation of income chargeable to tax under various heads of income​.

  • If an individual received a dividend of Rs 11 lakh from an Indian company, what will be the income tax levied?

If a resident individual, firm, or HUF receives dividends, it is taxable in the hands of the recipient and would fall under the head ‘income from other sources’.