Synopsis: Most people believe gifts are tax-free in India but that’s only half the truth. From cash transfers to property deals, gifting can quietly trigger income tax scrutiny. This article breaks down who pays tax, when exemptions apply, and how smart gifting can actually save money.
However, gifting can attract scrutiny from the Income Tax authorities. The article explains what a gift is, who is liable to pay tax for gifts and how these gifts are taxed. The article also highlights major tax exemptions and advises on how to save tax by gifting.
As per the Income Tax Act, any money, property, either movable or immovable, received by an individual from another individual or organisation without having to pay any consideration, i.e., without any payment in return, is referred to as a Gift.
In India, the gift tax was abolished in 1998. This might confuse the public, as there is no tax for gifts. However, the reality is different. Under the Income Tax Act, 1961, gifts are subject to tax under certain conditions.
Taxation of gifts
Gifts received can be classified into 3 major categories.
- Money Received: This includes monetary gifts such as cash, cheques, drafts, bank transfers, etc.
- Movable Property Received: Gifts that can be physically moved from one place to another, such as shares, bonds, paintings, etc.
- Immovable Property Received: Gifts that cannot be physically moved, such as land, buildings, residential or commercial property, etc.
The person who gives the gift has no tax implications. However, the receipt of the gift is subject to tax. Each type of gift received is taxed differently. This depends on various factors, such as from whom the gift is received, the event, and the value of the gift, among others.
| Type of Gift | How It Is Taxed |
| Any sum of money without consideration, i.e cash, draft, cheque, or bank transfer | If the aggregate value of the monetary gifts received during the financial year is less than ₹50,000 is not taxable. If it is higher than ₹50,000, the entire amount received is taxable under “Income from other sources.” |
| Immovable Property, like land, building, etc, received without making any payment | If the stamp duty value ≤ ₹50,000, it is not taxable. But, if the stamp duty value exceeds ₹50,000, the entire stamp duty value is taxable as income. |
| Immovable Property, like land, building, etc, purchased at a price lower than the stamp duty value of the property. | If the difference between the stamp duty value and purchase price ≤ 10% of the consideration, it is not taxable. If the difference exceeds 10% and ₹50,000, then the difference amount is taxable. |
| Movable property like shares, jewellery, paintings, etc, received without making any payment | If the aggregate FMV ≤ ₹50,000, it is not taxable. If the FMV exceeds ₹50,000, the entire FMV is taxable as income. |
| Movable properties like shares, jewellery purchased at a price lower than the fair market value (FMV) of the property | If the difference between FMV and purchase price ≤ ₹50,000, it is not taxable. If the difference exceeds ₹50,000, the difference amount is taxable as income. |
Gifts Exempted from Tax
1. Gift received on a certain occasion:
- Marriage of the individual
- Under a will or by way of inheritance
- On the death of the donor
- Distribution of capital assets of an HUF
2. Gift received from specific people:
- Relatives, which includes the spouse, brothers and sisters of the individual or spouse, brothers and sisters of the individual’s parents or parents-in-law, any direct ancestor or descendant of the individual or spouse, and the spouse of any such relative.
- From any local authority as defined under section 10 (20C)
- Any charitable or religious trust registered under section 12A, section 12AA, or section 12AB
3. Gift received from specified institutions:
- Any fund, foundation, educational institution, medical institution, or any trust or institution referred to in Section 10(23C)
- Trust created solely for the benefit of the relative of the individual
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How can you save tax by gifting?
If the gift giver and receiver are not relatives, the maximum tax-free amount of the gift in a financial year is ₹ 50,000. Gifts exceeding this limit are taxed; in contrast, gifts of any amount received from relatives are completely exempt from tax.
At the same time, if the income is generated from the gift money received through deposits or investments, it is taxed. This phenomenon is called ‘Clubbing’. However, you can avoid clubbing by gifting a relative who has a lower taxable income.
In this way, they can invest and generate an income, still they won’t have to pay tax. This is one smart way to invest and save money at the same time.
Other Important Points to Note
Clubbing of Income Provisions: If a person gifts money to their spouse or minor child, and that money generates income (such as interest, dividends, or rental income), such income is clubbed with the income of the gift giver and taxed in their hands, as per the Income-tax Act, 1961.
Tax on Income Earned From Gifts: While a gift itself may be fully exempt from tax, any income earned from the gifted amount such as interest on deposits, dividends from shares, or returns from investments is taxable as per the applicable income tax slab of the recipient (subject to clubbing rules, where applicable).
Conclusion
In India, gifting is not tax-free as many believe. Although giving a gift does not incur tax, receiving a gift may be subject to tax. However, expressing love through gifts doesn’t have to be always so expensive.
There are significant exemptions available under certain conditions, which you can avail to reduce your taxable income. By understanding the laws around gifting in India, you can gift and receive assets without stressing about the tax implications.
FAQs
Gifts from abroad are taxed in the same manner as gifts received in India. FEMA regulations may apply separately.
As birthday is not covered in the list of prescribed occasions on which gift is not taxed, gifts received on birthdays are fully taxed.
– Any sum of money or any property received by an individual, from any person, to cover expenses for any illness related to COVID-19, shall not be charged to tax if he furnished a Statement in Form No. 1 providing the details of the amount received during the year.
– Any sum of money or any property received by a family member of a person who died due to COVID-19 shall not be taxed.
