The Gift Tax Act, 1958, was introduced by the Government of India with the objective of levying tax on giving gifts. It followed a ‘donor based’ taxation system in which the gifts were taxed in the hands of the donor. However, in October 1998, this act was abolished and all the gifts were made free of tax.

A few years later, in 2004, Gift Tax was reintroduced in the Income Tax Act, 1961, under Section 56 and brought into effect from 1 April 2005 under Finance Act, 2004. Now, the gift tax shifted to a ‘donee based’ taxation system and gifts received became taxable in the hands of the recipient.

Exemptions under gift tax

  1. Gifts received from certain relatives, like spouse, parents and siblings, are exempted from tax. Such relatives may also include any lineal ascendant or descendant of a person or his/her spouse and siblings of the spouse. Although the gift received from these relatives are exempt from tax, any income generated from those gifts may be taxable under the ‘clubbing’ of income provisions of the Income Tax Act.

    For example, if Mr. X gifts Rs. 10 lakh to his wife, the amount will not be added to the income of his wife. However, if his wife saves the money in a fixed deposit and earns interest, the interest will be added to the income of Mr. X.

  2. In a financial year, gifts up to Rs. 50,000 are exempt from tax. However, if you receive gifts higher than this amount, the entire amount of the gift gets added to your income and becomes taxable at your slab rate. For instance, if you receive Rs. 60,000 from a friend, the entire amount will be taxable under the head ‘income from other sources’.

    In a different scenario, if you receive Rs. 50,000 from one friend and Rs. 30,000 from another friend as gift, the limit of Rs. 50,000 is breached and the entire gift amount (Rs. 80,000) will be taxable in your hands.

  3. If an individual receives any movable or immovable property as a gift for inadequate consideration, the difference between the consideration and the stamp duty is considered as a taxable gift. However, if the difference between the actual value and stamp duty is less than Rs. 50,000, the transfer is not considered as a taxable gift.

  4. Gifts received by an individual during his/her marriage is exempt from tax.

  5. Gifts received under a will or inheritance and gifts received in contemplation of the death of the donor are exempt from tax.

Thus, it is advisable to give and receive gifts cautiously. While gifts bring with them a lot of joy, you must make sure that they do not bring tax liability upon you or your near ones.

DISCLAIMER

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.



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