Taxability of Gift
Under the Income Tax Law, transfer of any property (movable or immovable) is subject to capital gain tax. However, tax on gifts received operates differently. If the transfer qualifies as a “Gift”, then the same shall not be considered as taxable transfer for levying income tax on gift. There is no definition for ‘gift’ provided in the Tax Law. However, based on judicial precedents, the following criteria essential for a transaction to qualify as ‘Gift’:
- The transfer must be made voluntarily by the Donor / Transferor; and
- The Transfer must be made without consideration
Though the term ‘gift’ is commonly understood as between natural persons on account of natural love and affection, the Income Tax Act covers gift transactions even between any persons (including corporates).
Now, the question arise whether a gift is income in the hands of recipient. Gift, in the hands of Donee, ordinarily represents capital receipt and is not of income nature. However, there is an exception in the Indian tax law to consider certain gift transactions are considered as taxable income in the hands of Donee (the person who accepts the gift).
The Income Tax Act provides that the transaction value of gift would be subject to tax in the hands of recipient (donee) as income from other sources if he received without consideration or for inadequate consideration. The conditions leading to taxability of gift are as below.
Any sum of money (cash) transferred that is above threshold value of Rs. 50,000 shall attract income taxes on gifts, which is on the whole sum of money. If the gift is in the form of immovable property, categories that specify taxability of gift are two. If the transfer is made without consideration, where Stamp Duty Value (SDV) exceeds Rs. 50,000, the whole SDV shall be taxable. If the transfer of immovable property is made for inadequate consideration, where the consideration is less than SDV and the difference is more than aggregate of INR 50,000 and 5% of consideration, then such excess of SDV over consideration shall be taxable.
In the case of any Property (other than immovable Property), if transfer is made without consideration and the Fair Market Value (FMV) exceeds Rs. 50,000, the whole of FMV shall be considered for tax on gifts received. In the case of inadequate consideration, if consideration is less than FMV and the difference is more than INR 50,000, such excess of FMV over consideration shall be taxable.
Above system of taxes on gifts shall not be applicable if the person (individual) receive such money or property in the following occasions / from person:
- Gift from relative exempt from income tax, this includes income tax on gift received from parents;
- on the occasion of the marriage of the individual; or
- under a will or by way of inheritance; or
- in contemplation of death of the payer or donor, as the case may be; or
Thus, in the above mentioned scenarios, there shall be gift tax exemption.