Everyone loves to receive gifts but hates to pay gift tax or tax on gifts. The basic definition of gift is an asset received by you without consideration. The definition of asset covers both productive and non-productive asset. Productive assets are those which fundamentally appreciates in value and provide returns like property or flat. A non-productive asset is depreciating in nature like a car. Today a car bought for 6L will be worth only 4L after 1 year. In my opinion, idle cash lying in the locker is also a non-productive asset as inflation depreciates the value of cash. All the assets are not charged to tax (if applicable). For example, there is a specific definition of a movable asset that we will discuss later. Any asset not classified as a movable asset is nontaxable.
The people find out ways to avoid gift tax. One of the common ways is to sell the property for inadequate consideration. For example, if i gift a property worth Rs 1 Cr for Rs 40L to my friend though the fair market value of the property is 90L. Here 90L is stamp duty value. Now it is very difficult to ascertain whether the property is heavily discounted because of market conditions or some other reason. Assume, i indirectly gifted 50L to my friend because of XYZ reason. Income tax department will consider 50L as a gift irrespective who is buyer/seller (non-relatives). There are provisions in Income Tax Act to charge tax for such transactions. If the tax is not paid then you may receive a notice from income tax department.
What is the definition of GIFT?
The following are classified as gift
1. Monetary Gift like money received without any consideration. Here consideration mean without any barter.
2. Gift of Movable Property i.e. transfer of specified movable property without any consideration. Here movable property means jewellery, shares, securities, archaeological collections, drawings, paintings, sculptures or any work of art and bullion that can be moved from one place to another. Any other movable property i.e. not defined in this definition is not charged to tax.
3. Movable property received for less than its fair market value. For example, if i gift 10 gm gold to someone for Rs 20,000 whereas its fair market value is Rs 30,000.
4. Gift of immovable property without consideration
5. Immovable property received for less than its stamp duty value
Gift Tax – Tax Treatment
As such there is NO standard definition of Gift Tax but this is the most common lingo used in India. Therefore, i will refer any gift charged to tax as a gift tax. If the following conditions are satisfied then the gift is taxable
(a) Amount received without consideration
(b) The aggregate value of the money received during a financial year is more than Rs 50,000
The gift may be received through cash, cheque, bank draft, bearers cheque etc.
Gift Tax – Exemption
Good news for taxpayers is that monetary gifts, property or movable property received are exempted in certain cases. These cases are as follows
1. Money or property or movable property received from relatives
Definition of Relative is
A. Spouse
B. Brother or Sister
C. Brother or Sister of the Spouse
D. Brother or Sister of either of the parents
E. Any lineal ascendant or descendent
F. Any lineal ascendant or descendent of the spouse
G. Spouse of the persons referred from B to F
* Lineal Ascendant means father, mother, grand father, grand mother and so on
* Lineal Descendent means children, grand children and so on
* There is NO LIMITATION on the degree of relationship i.e. it can be 1st degree, 2nd degree, 3rd degree and so on
* In case of HUF, any member thereof
2. Money or property or movable property received at the time of marriage both from relatives and non-relatives i.e. any amount or any no of gifts received are tax free :)
3. Money or property or movable property received under WILL or by way of inheritance.
4. Money or property or movable property received in contemplation of the death of the payer or donor. To be honest the definition is not so clear in income tax act. As i understand, any person who is ILL and expects to die shortly because of illness can gift with a condition. The condition is that gift will be kept or retained only if the person die. In case, the person/donor recovers from illness then the person has right to resume/recover the gift. Therefore, it is different from the WILL.
5. Money or property or movable property received from local authority
6. Money or property or movable property received from any foundation, medical institution, fund, hospital, educational institution, university or any other trust or institution as referred to in section 10(23C) or registered u/s 12AA.
7. Shares received because of demerger or amalgamation of a company or business reorganization of a co-operative bank subject to the applicable provision in Income Tax Act.
Misconception about Gift Tax
1. Gift received at the time of birthday, anniversary etc are tax free: It is not correct. All the gifts received except on the occasion of marriage will be charged to tax.
2. Gift received from a friend is tax free: Only the gifts received from relatives as i explained earlier are tax free. Any gift received from a friend will be charged to tax
3. Gifts received from abroad are tax free: The rules are same whether the gift is received from India or Abroad. Therefore, any property located abroad and received as a gift in India does not satisfy tax exemption conditions as shared in this post then the gift tax will be applicable.
4. The aggregate gift value is more than Rs 50,000 but the individual gift value is less than Rs 50000, therefore, it is tax free: Again wrong understanding. For example, if i receive a gift of Rs 20,000 each four times from a friend and an office colleague then the total gift value i.e. Rs 80,000 will be charged to tax. The friend and office colleague are not covered under the definition of relative. Therefore, the gift tax is applicable in this case.
On the contrary, in the same example, if i receive the gift of Rs 20,000 from my friend and Rs 20,000 from my office colleague then the gift tax is not applicable. The reason being, aggregate value received is less than Rs 50,000.
5. Only the amount exceeding Rs 50,000 is charged as Gift Tax: It is not correct. Many taxpayers claim exemption of Rs 50,000 and pay gift tax on balance amount. For example, Mrs. Renu received cash gifts of Rs 90k on her marriage anniversary. She paid gift tax only on Rs 40,000 i.e. claimed exemption on Rs 50,000.
Just to clarify, if the aggregate value exceeds Rs 50,000 then the total value is taxable and charged to gift tax.
When is Gift Tax applicable on Property?
An immovable property i.e. land or building received as a gift i.e. without consideration, the gift tax is applicable if the following conditions are satisfied
(a) Immovable property is a capital asset
(b) Stamp duty value of immovable property exceeds Rs 50,000
For example, i received a property as a gift. The property value is Rs 5L and stamp duty value is Rs 4L then in this case i need to pay gift tax. Practically speaking, you will not find a property with stamp duty value less than Rs 50,000 in urban and semi-urban areas.
Maybe in villages you can receive a property from non-relative as a gift whose stamp duty value is less than Rs 50,000 and gift tax is not applicable.
What if the Immovable Property is received for less than its Stamp Duty Value?
This is another common query on my blog. Wherein a property is bought for less than stamp duty value. A property is charged to tax if
(a) Immovable property is a capital asset
(b) The consideration value of the property is less than the Stamp duty value of the immovable property and the difference exceeds Rs 50,000
In this case, the difference amount i.e. Stamp duty value minus the consideration value will be treated as income from other sources for the buyer. It will be taxed as per income tax slab of the buyer.
This rule is not applicable for the cases shared in the section “Gift Tax – Exemption”
Tax Treatment of Movable Property
The movable property is charged to tax under following conditions
(a) The movable property is received as a Gift i.e. without consideration
(b) The aggregate fair market value of the movable property exceeds Rs 50,000
In this case, the aggregate fair market value of the movable property will be treated as income in the hands of the receiver. Any movable property outside the definition of movable property is not charged to tax. For example, if i receive a LED TV worth Rs 85k as a gift from my friend then it will not be charged to tax. Please note that car is not covered in the definition of movable property.
What if the movable Property is received for less than its Fair Market Value?
Wherein a movable property is bought for less than fair market value. A movable property is charged to tax if the consideration value of the movable property is less than the aggregate fair market value of the movable property. Secondly, this difference exceeds Rs 50,000 i.e. i bought at a lesser value than fair market value.
In this case, the difference amount i.e. Stamp duty value minus the consideration value will be treated as income from other sources for the buyer.
This rule is not applicable for the cases shared in the section “Gift Tax – Exemption”
How to calculate Gift Tax?
There is no separate formula. The gift amount or value of the gift that will be charged to tax is added to the “income from other sources”. It will be then taxed as per the income tax slab of the taxpayer. For example, if your taxable income is 8L and gift amount / value is Rs 5L. Therefore, Rs 5L will be added as your income from other sources. The total taxable income will be 13L.
In layman terms, out of 5L charged to tax, 2L will be taxed at 20% and balance 3L will be taxed at 30%.
Copyright © Nitin Bhatia. All Rights Reserved.
Thank you for the article, cleared up some misconceptions.
Hello Sir,
Suppose I deposit some amount in my wife’s saving account as gift in which I am 2nd holder . And if she invest in PPF/Equity/FDs etc, then the return on investment will be taxed to me ? or is it only taxable to my wife?
waiting for reply.
Thank you.
If the income from investment is taxable then it will be taxed in your hand because of clubbing of income provisions. If the income is tax free like in case of PPF then there is NO tax liability on you or your wife.
Dear Sir
This is with regards to the section ‘Gift Tax Exemption’. Say I want to buy a property and for that I consolidate the money from a) my own savings b) bank loan c) source money from my family members like my parents (c1), brother(c2) and wife(c3). Does c1,c2 and c3 attract any gift tax keeping in mind that c1,c2 and c3 will be invested in buying a property ?
Your query is not clear to me. You have not mentioned whether c1, c2 or c3 will be co-owners as investors. Secondly, whether you will return back amount they will pool or you will retain forever.
c1,c2,c3 will NOT be co-owners. The amount they pool will not be returned back, it will be retained forever.
There will not be any gift tax. You can execute gift agreement.