How are gifts taxed in India?

Law related to taxation of gifts cover all 'persons' who are in receipt of specified gifts..

The word ‘gift’ generally brings with it a feeling of reward and gratitude, without any obligation on part of the recipient. However, little does a recipient know that the gift could also have a tax incidence associated with it.

Broadly speaking, the genesis of taxing gifts in India started with the introduction of the Gift Tax Act, 1958. The Gift Tax Act followed a ‘donor based’ taxation, wherein the gifts were taxed in the hands of the donor at a flat rate of 30% with a basic exemption of 30,000. The Gift Tax Act was repealed with effect from October 1998 and the donor as well as the recipient were not required to pay taxes on the gifts given / received. This was a big change in the tax regime vis-à-vis gifts.

Reintroduction of Gift Tax in the Income Tax Act, 1961

Elimination of gift tax witnessed distribution of property (both movable and immovable) and income freely, resulting in tax planning and in some cases even tax avoidance. Accordingly, to curb incidents of tax avoidance, taxation of gifts was re-introduced in the Finance Act (No.2) 2004, with effect from 1 April 2005. This time, however, the emphasis shifted from ‘donor-based’ taxation to a ‘donee-based’ taxation, i.e. the income from gift(s) became taxable in the hands of the recipient.

Over the years, the law related to taxation of gifts has undergone many changes and its scope has widened. Initially, only individuals and Hindu Undivided Families (HUFs) were covered within the ambit of taxation under the Income Tax Act vis-à-vis gifts. Today, the scope is wide enough to cover all ‘persons’ who are in receipt of specified gifts above the prescribed threshold limits.

Interestingly, for tax purposes, ‘person’ includes an individual, HUF, company, firm, an association of persons, a body of individuals, a local authority, an artificial juridical person, etc.

Taxability of gifts under the I-T Act

As per the current tax law, any person (donee / recipient) receiving a sum of money, or an immovable property or any other specified property from any other person (donor) without consideration or for an inadequate consideration i.e. less than the fair market value of the property or stamp duty value in case of an immovable property, is liable to be taxed on the value of such gift.

In the above context the ‘property’ includes 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 have been carved out for certain specified categories of persons / recipients from the purview of taxation from gifts. Companies under certain specified schemes of reorganization too have been exempted from the above incidence of tax.

Exemptions from taxation

Below is an illustrative list of types of receipts that are specifically exempted from qualifying as gifts and consequentially, from the incidence of tax thereon:

• Any sum of money or any property received from a specified relative on any occasion.
  In the above context, it has been clarified that ‘relative’, in case of an individual shall include his/her spouse, spouse’s siblings, siblings of either of the parents of the individual, any lineal ascendant or descendant of the individual, the individual’s siblings, spouse of the individual’s siblings, any lineal ascendant or descendant of the individual’s spouse, spouse of the lineal ascendant or descendant of the spouse of the individual. In case of a HUF, relative includes any member of the HUF.
• Any sum of money or any property received from any person on the occasion of the marriage;
• Any sum of money or any property received under a will or by way of inheritance;
• Any sum of money or any property received in contemplation of death of the payer;
• Any sum of money or any property from an individual by a trust created or established solely for the benefit of relative of the individual; etc.

FEMA regulations governing gifts

It is pertinent to note that besides the income tax provisions, in case of any cross-border gifts like the ones involving non-resident Indians (NRI) or persons of Indian origin (PIO), the provisions under the Foreign Exchange Management Act, 1999 (FEMA) should also be examined.

One particular aspect that requires careful evaluation is the difference in the way ‘relative’ is defined under the Income Tax Act vis-à-vis FEMA. While the Income Tax Act exempts gifts between relatives (as mentioned above), the meaning of the term ‘relative’ under FEMA is much narrower and restricted to include spouse, father, mother, son, son’s wife, daughter, daughter’s husband, brother and sister of the individual.