Giving and receiving gifts is an integral part of India’s cultural heritage. While in most cases, the value of such presents is nominal, but in some cases, the value of gifts such as property, jewelry, works of art, etc., can be substantial. To provide clear guidelines regarding which presents are taxable and the rate at which gift tax would be applicable, the Gift Tax Act was initially introduced in 1958. However, this act was later repealed in 1998.
After the Gift Tax Act, 1958 was repealed, all presents, irrespective of their value, were tax-free till the reintroduction of new rules for gift taxation in 2004 as part of the Income Tax Act. These provisions for the taxation of presents were further amended in 2010. As a result of multiple changes to tax rules governing presents, many of us are confused regarding the tax implication of the gifts we receive.
In this article, we will discuss various rules and regulations regarding how gifts are taxed in India.
What is a Gift as per the Income Tax Act?
Under the definition provided by the Income Tax Act, a “gift” can be in the form of money and movable/immovable property that an individual receives from another individual or organization without making a payment. In legal terms, the person or organization providing the gift is termed the donor while the gift receiver is known as donee.
By this definition, examples of presents that are taxable in India include:
- Money received by cash, draft, cheque, bank transfer, etc.
- Immovable property such as land, building, residential/commercial property
- Movable property such as jewelry, shares, bonds, paintings, sculptures, etc.
When are Gifts Exempt from Gift Tax?
Under current tax laws, not all gifts received in India are subject to tax. However, the Income Tax Act, 1962 includes key provisions which allow you to receive various tax-exempt gifts.
For instance, if you receive gifts or cash of up to Rs. 50,000 in a financial year, you do not have to pay any gift tax on it.
Similarly, if you receive presents from your parents, spouse, siblings, or other close relatives such as your in-laws, there is no tax liability. Again, this exemption from gift taxation is applicable no matter what its value is.
In India, it is not uncommon to give expensive presents such as jewelry and even property on the occasion of marriage. However, under current rules, you do not have to pay any tax on gifts received when you get married, irrespective of their value.
If you receive money or property as an inheritance or through a will, that is legally considered a gift because you do not make any payment to receive it. In this case, too, no gift taxation is applicable.
Another example of a tax-exempt gift is when you receive money or property from local authorities or any recognized religious or charitable organization.
How Do You Calculate the Taxable Value of a Gift?
To calculate how much tax you need to pay when you receive a present, the Income Tax Act includes provisions to calculate the taxable value of presents. The below table shows how the taxable value of various types of monetary as well as non-monetary presents is calculated:
|Type of Gift||Applicability of Gift Tax||Taxable Value of the Gift|
|Cash, Cheque or Bank Transfer||If the value of the gift exceeds ₹50,000||The entire sum of money received as a gift|
|Immovable property such as land, building, etc. without consideration (i.e., without making any payment)||If the Stamp Duty Value of the gift exceeds ₹50,000||Stamp duty value of the property received as a gift.|
|Any immovable property for inadequate consideration (i.e., property purchased at a price lower than the Stamp Duty Value of the property)||If the Stamp Duty Value of the gifted immovable property exceeds the purchase price by more than ₹50,000||The difference between the Stamp Duty Value and the purchase price of the gifted property is taxable.
Example: If the Stamp Duty Value of the gifted property is ₹2 lakh and the purchase price is ₹1 lakh, the taxable amount is ₹1 lakh (2 lakh – 1 lakh).
|Assets such as jewelry, shares, paintings, sculptures, etc. without consideration (i.e., without making any payment)||If the fair market value of the gift exceeds ₹50,000||Fair Market Value of the gift.|
|Assets such as jewelry, shares, paintings, sculptures, etc. for consideration (i.e., bought by the donor before being gifted)||If the fair market value of the gift exceeds the purchase price by more than ₹50,000||The difference between fair market value and the purchase price of the gift is taxable.
Example: If the fair market value of jewelry given as a present is ₹3 lakh and the original purchase price is ₹2 lakh, the taxable amount is ₹1 lakh (3 lakh – 2 lakh).
How to Declare Tax on Gifts in India
Under the now-repealed Gift Tax Act of 1958, the payment of tax on gifts earlier rested with the donor. But under current Income Tax rules, gift taxation is a form of direct tax, and the donee, i.e., the receiver of the present, is responsible for declaring and making the appropriate tax payments.
To calculate the tax payable, the value of the present has to be declared by the donee at the time of filing Income Tax Returns under the head “Income from Other Sources.” Thus, the taxable value of the gift becomes part of the income of the donee for the Financial Year. The gift tax liability is then calculated as per the income tax slab rate of the donee. So, potentially, individuals in the highest income tax bracket will have to pay 30% tax (plus applicable Health and Education Cess) on presents received during a financial year.
Having a clear understanding of how gift taxation in India works can help you make accurate income tax declarations. It can also help you plan to minimize your tax burden before filing Income Tax Returns. In the long term, this will not only help you avoid receiving a notice from the Income Tax Department for unpaid taxes but also allow you to benefit from your presents with minimal increase to your income tax liability.