Gift Tax in India – Everything you wanted to know about rules and exemptions

1. Upto Rs 50,000/year is not taxable

 

• By virtue of Section 56(2), any sum of money exceeding Rs. 50000 received without consideration by an individual or an HUF from any person is chargeable to tax as income under “other sources” subject to some exclusions .

 

• The first major rule which every person should know is that there is no tax to be paid on gifts received (cash or kind), if the amount of the gift is upto Rs 50,000 in a year.

 

•  But If Your total gifts in a year is Rs 60,000, then you will have to pay tax on the total amount of Rs 60,000 , not just on additional Rs 10,000 . This Rs 60,000 will be included in your income and you will have to pay tax on this Rs 60,000, as per your tax slab.

2. Any amount received by relatives is not taxable at all

 

Your spouse

Your brother or sister

Brother or sister of your spouse

Brother or sister of either of your parents

Any of your lineal ascendants or descendants

Any lineal ascendant or descendant of your spouse.

Spouse of the persons referred  in above points

 

Note : Lineal Ascendant means your father,grandfather, great grand father...     Lineal Descendant means your son, grand son, great grand son....

 

Example – So if you want to buy a house and your father/mother/sister/brother etc transfer Rs 20 lacs to your bank account. You don’t need to worry about the taxation part, because its a gift from your relatives and you will not have to pay any tax on this amount. However its a good practice to do the documentation for this, if the amount if pretty big like in this example. All you need to do is document this transaction on a paper which clearly states that who transferred the money and the reason for it, along with the signatures of both parties. In future, if there is any income tax scrutiny, this small piece of proof will be handy and will help you a lot.

 

Documenting Gift transactions

 It a document which transfer the legal title of the property to the donor, where the consideration is not monetary but is made in return for love and affection.

• Writing a plain typed note on a paper will generally suffice.
• It is not required to be stamped and registration is also not needed.
• You may simply mention the names of persons, their relation.
• And the gift is being given out of love and affection.

Movable Property & Immovable Property should be Registered/Stamped.

• Gift made by way of movable property is required to be made in stamp paper and stamped by the notary or court, and registration of gift deed is not required in this case.
•  For the purpose of making a gift of immovable property, the transfer must be effected by a registered instrument signed by or on behalf of the donor.
•  Gift of immovable property which is not registered is not valid as per law and cannot pass any title to the receiver.

 

 

3. Any amount received as Wedding Gift is not taxable

 Wedding gift is not taxable in your hands, either from relative or non-relative .

 

 However, it is not clear by provision, whether the gifts should have been on the exact date of marriage, or a few days before or later. Normally, it should be sufficient if the gift is given just on the occasion of the marriage, means either on the day of the marriage itself or a day or two before or after.

 

4. Gift Tax on Movable/ Immovable properties

There is a valuation aspect involved in gifting of immovable properties

• If the property is gifted without any consideration then if the stamp duty value exceeds Rs. 50000/-, stamp duty value will be taken
• If the property is gifted for a consideration, then the actual value of the property will be taken

In case of other properties:

• If gifted without consideration and fair market value exceeds 50,000, then the fair market value will be taken as the final value
• If gifted for a consideration and the Fair Market Value (FMV) less consideration is greater than 50000, then the FMV less consideration amount will be taken as the value of the gift.

5. No tax on the amount received through WILL or Inheritance

When any sum of money or any property is received under a will or by way of inheritance, it is totally exempt from Gift Tax. So if you get a real estate worth Rs 50,00,000 and some other things worth Rs 30,00,000 through inheritance , you will not have to pay any tax on that amount received.

6.Tax Implication on the income earned, when the gifted money is invested

 

What happens when the gifted money is invested in products like FD’s or shares? Let’s say that the wife invests this Rs. 1 lacs in a bank FD and earns an interest @10% annually, ie Rs 10,000.

Now who will pay the tax on this interest of Rs 10,000?

 

Husband or Wife?

I know most of the people will think that its wife, because once she gets the gift, now its her money and she is 100% owner of that money and any income generated from that should also be her own income and she should pay the income tax on that amount. So here in this case, if wife does not have any other income apart from this Rs 10,000 , then her total income for the year will be Rs 10,000 only and as its lower than the exemption limit, so she will not be paying any tax and won’t be required to file any income tax returns.

 

However in real life, this is not how it works.

 

In this case, IT department clearly knows that people will gift the money to their spouse who does not have any income, so that the whole income generated become’s tax-free. To combat this, there is something called as Income Clubbing provisions, which adds the income of one person in other income in certain cases, and that will apply in this case.

So in the above example, this interest income of Rs. 10,000 would not go tax-free and will be clubbed with husband’s income and he has to pay tax based as per the applicable tax slab.

So if, husband earned Rs 10 lacs a year, now this Rs 10,000 will be his additional income making his total yearly income as Rs 10.1 lacs.

 

But Income earned from the income earned is not clubbed

 

One interesting point to note is that any further income generated from the income is not clubbed further and that will be 100% income of the person who got the gift.

So in above example, when wife gets Rs 1 lacs as gift, and earns Rs 10,000 as the income, that Rs 10,000 will be clubbed with income of husband, but when this Rs 10,000 is further invested into FD again and earns Rs 1,000 income, this time – it will be wife’s income and not husband.

So now, how you can apply this rule in real life? Here is a tip !

Let’s say you have Rs 10 lacs with you. If you invest this money in your name, you will earn Rs 1 lac as income from it and pay tax on it, but next time again when you invest this 1 lac, you will earn Rs 10,000 and then again have to pay tax on it because it will be your own income.

 

What is the alternative way ?

What you can do here is that, you can invest Rs. 10 Lakhs in your wife’s name and earn an interest of Rs. 1 lac. This Rs. 1,00,000 will be clubbed in your income for the computation of income tax; which was going to happen anyways. however, when your wife further invests this 1

However, when your wife further invests this 1 lac in another FD and earns Rs. 10,000 (assuming 10% interest) as interest on it, this time it will be considered as her income and will not be clubbed with your income. Assuming husband in 30% tax bracket, it’s a saving of Rs 3,000. Might look small, but its one of the ways to save the tax by Rs 3,000 in a legal way.

Be cautious about the take and give transactions

At times, we ask for money from our friends for some purpose and then give it back.  He swiped his credit card for a friend for Rs 50,000 and then asked his friend to pay him back through online banking. Here if you see, the amount came to his account, however it was a reverse transaction and not actually a gift, so ideally this transaction should not be considered at all.

 

                       If its a small amount and can be justified with proofs, there is not much to worry about this. But in this case, lets say there is a income tax scrutiny, and tax inspector asks you about this “Rs 50,000” coming to your account. Now – You can clearly say that the money you got from your  friend was a amount which you got back because you paid Rs 50,000 to him through your credit card. But just saying this will not be enough, He will ask you to prove it. Then you will have to bring your credit card statement, and prove to him that this was done by you for your friend and no one else.

 

                     If you have taken loan from friend and you have a proof that you have returned that money through your bank account,you need not worry. But if you have paid offline through cash, it is better to document and take necessary signatures from your friend so that in case of any IT scrutiny, these documents would be handful. if you cannot prove, IT DEPT has every right to include this as taxable income and you need to pay tax. Also if you have taken the amount as loan and not repadi within same financial yera through your bank account, it is better to have a document that you have taken loan so that you can provie this to IT dept.