Gift Tax - What Is Gift Tax Exemption?

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  • 07 Feb 2023

Introduction

In India, gifts began to get taxed with the introduction of The Gift Tax Act, 1958. According to the gift tax act, a donor would be charged a flat rate of 30% with the basic exemption of ₹30,000. This "donor-based" taxation was repealed in October 1998, and thus, the donor as well as the recipient was not required to pay taxes on gifts given or received.

This tremendous change in the tax regime resulted in greater incidences of tax avoidance in a number of cases. Hence, to restrain tax avoidance, gifts were taxed with the reintroduction of the Finance Act (No.2) 2004, effective from 1 April 2005. However, this time, taxation shifted from the donor solely to the recipient. Since then, there have been many changes in the law related to gifts taxation and its scope has widened considerably.

At first, only Hindu Undivided Families (HUFs) and individuals were covered within the ambit of gift tax exemption under the Income Tax Act. But today it covers every individual who receives specified gifts above the prescribed threshold limits. This means, any individual, organization, firm, a body of individuals, local authorities, an association of persons, HUF etc. falls under the term 'individual'.

As such, the gift tax is applied on money offered in the form of cash or cheque, immovable property such as land or movable assets such as jewellery, art or shares, under certain conditions.

As a recipient, here are the provisions of The Gift Tax Act:

Gift covered Threshold Taxed component
Money in the form of cash or check
Amount above ?50,000
Total amount
Immovable property such as land without consideration
Stamp duty value above ?50,000
Stamp duty value of property
Immovable property such as land for inadequate consideration
Stamp duty value above ?50,000
Stamp duty value minus consideration.
Movable property such as jewellery, share certificates, art etc. without consideration
Fair market value greater than ?50,000
Fair market value of the property
Movable property for consideration
Fair market value concentration above ?50,000
Fair market value minus consideration

Hence, a gift from relative, as specified above, and the value the gifts hold, could decide whether the gift qualifies for exemption.

However, certain types of receipts are specifically exempted from qualifying as gifts. These include:

  • Money or property received from a specified relative on any occasion. In this context, the term ‘relative’ includes an individual's spouse, siblings, spouse's siblings, spouse of the individual’s siblings, siblings of either parent of the individual, lineal descendant or ascendant of the individual, spouse's lineal ascendant or descendant. In the case of HUF, a relative would include any member of the HUF.

  • Money or property received from an individual on the occasion of one’s marriage.

  • Money or property received through a will or by way of inheritance.

  • Money or property received in contemplation of a donor or payer's death.

  • Money or property received by a trust created or instituted solely for the benefit of the individual's relative.

In addition to income tax provisions, gifts received outside India, such as the ones where a Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) offers a gift, it falls under the Foreign Exchange Management Act, 1999 (FEMA).

While the income tax act exempts gifts from relatives, as stated above, the meaning of the word 'relative' under FEMA is only restricted to a few individuals such as father, mother, spouse, son, son’s spouse, daughter, daughter’s spouse, and the individual's siblings.

For instance, if X and Y are sisters, and A is the husband of Y, any property that A gifts to X would not be taxed under the Income Tax Act in the hands of the recipient. But, under FEMA, this exemption would not be permitted. While domestic regulations largely govern the principles of gifts in the country, any transactions with NRIs and PIOs must be carefully evaluated within the FEMA context. Ignoring FEMA could result in harsh noncompliance penalties.

It is vital to know the amount of remittances that can be received from overseas, as the maximum limits could impact the execution or implementation of gift transactions. For instance, under FEMA the Liberalized Remittance Scheme (LRS) states that a person can limit up to $250,000 outside India in aggregate in each financial year. Any amount beyond the specified limits under FEMA would need permission from the Reserve Bank of India.

Conclusion

And while The Gift Tax Act has evolved over the years, it has included specific exemptions taking into account honest transactions and gifting between relatives. Solemn occasions such as marriage involve receiving gifts and hence, The Gift Tax Act has accommodated such exclusions to sequester the recipient. One must be carefully observant of the prevailing laws and comply with the regulations to avoid negative implications or litigations and legal disputes. Knowing about the inclusions and exclusions on the gift law can permit you to safely receive a gift from relative exempt from income tax.

Tax planning in India regarding gifts falls under the inspection of the tax department, especially if the quantity is greater than the specified limit. This is why, it is crucial to maintain all documentation or receipts regarding the gifts received and to establish their genuineness.

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