Giving gifts are a way of showing love and appreciation. However, when the financial worth of the gift is significant, it attracts tax liabilities. Therefore, the Government sets specific parameters and limits just in case of gifts. If the gift outsteps those limits, it ceases to be just a present and is seen as a taxable income.
Points to recall for saving tax by gifting limitations
If the gift giver and receiver aren’t relatives, the highest tax-free transfer amount is Rs.50,000. However, if the gift amount outsteps that, then the entire amount, not just the surplus, enhances taxable as per the tax slab of the beneficiary. However, any amount of gifts received from or given to any relatives - parents, spouse, your and your spouse’s brothers and sisters, brothers and sisters of your parents are entirely tax-free.
Investing through relatives
To understand how you’ll save on your tax through gifts, you’ve got to realize another thing called ‘Clubbing’. There’s a misconception that if you gift a particular amount to your spouse or minor child, that quantity is automatically exempt from taxation. It brings us to our next point.
Example of ‘Clubbing’
Assume that you have a yearly income of Rs.10 lakhs. You gift Rs. 1 lakh from it to your wife, and you can’t claim that your taxable income is Rs.9 lakhs. So you have to pay taxes per your tax slab on the entire Rs. 10 lakhs.
Now, the Rs.1 lakh gift amount isn’t considered as your wife’s taxable income. However, if your wife invests that cash in, say, a Fixed Deposit (FD) within the bank, then the interest received from that FD are going to be considered taxable income, not of your wife, but you. This phenomenon is named ‘Clubbing’ and is the same if the quantity is presented to your child, who may be a minor.
The only way to save tax through gifts is by gifting to your parents or parents in law or a significant child. When you gift the amount, your taxable earning remains the equivalent, though. But, the interest they earn from other products by funding this money becomes their income. So, assuming their earnings are lower, you can rest in peace knowing that the money will not be taxed.
Before long term capital gains (LTCG) tax was active, the individual could also fund gift money in mutual funds or stocks for 1 year and lay hold of it out as tax-free earning. However, now it is impossible as LTCG tax has been reinstated with effect from 1st April 2018.
The Indian legislative system required a levy tax on gifts in the donor’s hands by enacting the Gift Tax Act, 1958. This legislation was abolished in 1998. However, 6 years later, the Finance Act 2004 introduced section 56(2)(v) for taxing gifts in the recipient’s hands. Accordingly, today gifts received by a person or Hindu Undivided Families (HUFs) are taxed as under.
Taxation of a gift from the employer
The legislations are penned, so on levy tax albeit gifts are provided by an employer to employees. Such gifts are taxable within the workers’ hands as salary income provided the mixture value is Rs 5,000 or more durin a year. Gifting has always been seen as how for people to precise love and affection. However, with the increased specialization in taxation, it becomes imperative to understand its taxability.
Taxability of gifts under the I-T Act
As per the law, a person (donee/recipient) receiving a sum of cash, or immovable property or the other specified property from the other person (donor) for inadequate consideration, (i.e. but for the fair market price of the property or stamp tax value just in case of immovable property), is inclined to be taxed on the worth of such gift.
In the above context, the property comprises immovable property being land or building or both, shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures, any work of art and bullion, etc.
Exemptions are fixed out indeed specified categories of persons/recipients from the purview of taxation from gifts. Companies under specifically defined schemes of reorganization too are exempted from the above incidence of tax.
Exemptions from taxation
Below is an illustrative list of sorts of receipts that are specifically discharged from qualifying as gifts and, from the incidence of tax thereon:
· Any sum of cash or any property received from a specified relative on any occasion.
In the above context, it’s been clarified that ‘relative’, just in case of a private, shall include their spouse, spouse’s siblings, siblings of either of the oldsters of the individual, the individual’s siblings, spouse of the individual’s siblings, just in case of a HUF, a relative includes any member of the HUF.
· Any sum of cash or any property received from a person on the occasion of the marriage;
· Any sum of cash or any property received under a will or by way of inheritance;
· Any sum of cash or any property received in contemplation of death of the payer;
· Any sum of cash or any property from a private by a trust created or established solely for the advantage of a relative of the individual; etc.
Due to substantial tax planning using gifts, gifts in India generally fall under the scrutiny of the tax department; especially the quantum is huge. Hence, it may be preferable to maintain documentation to establish the donor’s genuineness and sufficient source of funds with the donor to justify the gift.
At Itseki Mercurius India , we assist our clients in dealing with various income tax compliances, including income tax assessments, ITR filings, TDS returns, tax advisory and other related services by providing them adequate support and guidance from our end. If you have any questions or wish to know more about taxation on gifts in India, kindly contact us.