PROSPERR.IO

Receiving a gift is a common way to show love, appreciation, or celebrate milestones like birthdays, weddings, and special occasions. In India, however, not all gifts are tax-free. The Income Tax Act lays out rules that define the types of gifts that will be taxed, and those that are exempt. These rules also help ensure that gifts are being used for legitimate financial transactions, that tax is not being avoided by misusing the gift process, and that fair tax treatment will be provided to all taxpayers.

u/s 56(2)(x) of the Income Tax Act, any gift received by an individual or a Hindu Undivided Family (HUF) above a specified monetary limit may be taxable. This includes cash, movable assets like jewellery or shares, as well as immovable assets such as land or buildings. Certain types of gifts can be exempt, such as gifts made from relatives, gifts made at the time of weddings, gifts made/donated to charity, and gifts received through a will, etc.

In this article, we will break down the complex rules on the taxation of gifts in India, as well as explain who qualifies as a relative for the purpose of determining taxation, clarify the rules regarding the limits and exemptions of taxable gifts, and provide examples of how the gifts received could be considered taxable gifts.

What is the meaning of a Gift according to Indian Law?

Under the law of India, a gift is defined as any transfer of cash or assets without any compensation by the recipient. In other words, the recipient does not give anything for the gift. A gift can also encompass cash, gold, shares of stock, vehicles, land, homes and many other types.

A gift may be gifts can generally be classified into three different categories.

1) Cash Gifts – Cash, Bank Drafts or Cheques, Wire Transfers between Banks, etc.

2) Movable Property Gifts – A movable gift can be anything that can be transported to another location, i.e. gold, jewellery, stock, cars or any sort of Property that can be moved.

3) Immovable Property Gifts – Immovable property gifts would be considered to be Land, house or any type of Property that cannot be moved.

In the context of the Income Tax Act, the critical issue is that any single transfer of gifts made to an individual from a Non-Relative in the same tax year in excess of 50,000.00 will be included in the income calculation for “Income from Other Sources”; the recipient may have no other alternative than to report taxable income. Gifts received as part of marriage or from a Relative are normally exempt from taxation and may not have any form of taxation.

For example, if an individual receives 60,000 from a friend, that amount would be taxable, if that individual were to receive 100,000.00 from a brother as a wedding gift, that amount would not be taxable. The distinction between those types of gifts is crucial to avoid incurring unnecessary tax liability.

Monetary Gifts

Monetary gifts, commonly known as cash gifts, are considered among the most popular forms of gift giving in India. Cash gifts can take many forms, including cash given directly to someone, bank transfer, cheque and any other form of monetary value which is gifted to you without any consideration (i.e. you do not have to pay for it). According to the Income Tax Act, you are required to file your tax for any monetary gifts you have received during the financial year in excess of ₹50,000 if the gift was given to you by someone who is not related to you (i.e. friend).

In addition, there are many exemptions if the gift is given by one of the specified relatives excluded from the calculation of your taxable monetary gifts. Specified relatives include parents, siblings, spouse, lineal descendants and any other relative as determined by the Income Tax Act. Any amount of gift received from your specified relative(s) is fully exempt from taxation. If a relative gives you a monetary gift on the occasion of marriage, you are also entitled to a full exemption from taxation regardless of how large the gift is.

Example 1: Ravi received ₹70,000 from his friend Amit as a birthday gift. Because Amit is not a specified relative and the amount received exceeds ₹50,000, Ravi will have to pay taxes on the full amount of ₹70,000 under "Income from Other Sources".

Example 2: Priya received ₹1,00,000 from her brother as a wedding gift. Because his brother is a specified relative and because the gift was given to her on the occasion of marriage, Priya will not have to pay taxes on this gift.

It is very important to keep good records of your monetary gifts, including any documentation/documentation you may have (i.e. gift deeds, bank statements) if you intend to claim any exemptions from your taxable gifts. If you do not report your taxable gifts to the Income Tax Department, as required by law, you could be subject to further attention from the Income Tax Department and/or penalties.

Gift in Movable Property

The definition of movable property is any item or property that can be physically moved or transported easily (by example: a piece of jewellery, a vehicle, a work of art and stocks or shares). In India, gifts of movable property are taxable if the aggregate fair market value exceeds Rs.50000 during a financial year, and the gift is received from an individual who is not a relative.

Similar to gifts of money, gifts received from specified relatives are not subject to tax, regardless of their value. Gifts received by one individual on the occasion of his or her marriage, as well as all gifts received from charitable institutions, local authorities, etc., may also qualify for exemption from tax.

Example: Rakesh receives stocks with a fair market value of Rs.150000 from his uncle. Since the gift is received from a relative, it is fully exempt from tax, even though the value exceeds Rs.50000.

It is important to ensure that the value of the movable property is received at its fair market value for taxation purposes. For shares, the generally accepted method to determine fair market value of shares is the closing price on the date the shares are transferred; however, for jewellery and artwork, a qualified professional appraisal is most commonly used.

Gift in Immovable Property

Immovable property is defined as real estate or stations of real estate, which are unable to be moved (E.g.: land, residential homes & commercial buildings). Large quantities of immovable properties receive different treatment from cash and jewellery, as they are less liquid than cash or jewellery.

If you receive property that cannot be moved from someone who is not your relative (e.g., a friend, a business or an organization) and its overall fair market value exceeds ₹50,000, then it will be treated as a gift with a fair market value greater than ₹50,000 and therefore taxable on the fair market value of the property at the time of the transfer. In the case of an irremovable gift you would owe tax on it. Gifts given to you from relatives are not taxable; gifts from your spouse are not taxable; and gifts from charitable organizations are completely taxable; however, for income tax purposes you will owe tax on the value of any property you receive as a gift regardless of how much it costs or how much it is worth.

Examples:

1. An example of a gift that is not taxable: Vijay got a parcel of land from his uncle so since he received the parcel as a gift from his relative, it is completely exempt.

2. An example of a gift that is taxable: Anita received a home valued at ₹60,00,000 from a friend. So, since Anand received the gift from a non-relative and the value of the gift exceeds ₹50,000, the gift will be taxable.

Points to consider:

1. Tax computation for gifts is based on the stamp duty value of the property instead of the current market value of the property. (Tax calculation based on the stamp duty of the gift of property.)

2. The ₹50,000 threshold is calculated on the total of the value of all gifts received from non-relatives during the financial year.

3. Always keep a copy of the gift deed registered with the appropriate local authority as proof of ownership, especially if the value of the gift is greater than ₹50,000.

Who Is a Relative? (Crucial for Exemptions)

In order for a gift to be considered tax-free, it must be given by a relative. Gifts made to you by relatives tend to be considered completely tax-free, whereas gifts made by non-relatives can become taxable if they exceed ₹50,000 in value during one financial year.

Under Indian tax law, the term “relative” includes:

• Spouse of the individual
• Parents and lineal descendants (children, grandchildren)
• Siblings and their spouses
• Siblings of the spouse and their spouses
  

Example:

If your brother gives you ₹1,00,000 for your wedding, it is fully tax-exempt.

If a friend gives you ₹60,000, it is taxable, because a friend does not fall under the “relative” definition.

While it is important to understand what identifies someone as a relative when discussing gift taxes, this also applies to all types of gifts (including but not limited to) total value of each gift and the type of property gifted (movable or immovable). In general, high-value gifts (e.g. a house or parcels of land) that are given by relatives would be exempt from gift taxation, whereas similar gifts from non-relatives will typically be subject to the gift tax rules found in title 212.

Taxable vs Exempt Gifts: An Overview

Special Scenarios & Foreign Gifts

Most rules regarding gifts centre on the borders of family members and recipients at Rs 50,000 or less for a specific financial year; however, there are special rules about how to report gifts made during this time, including:

1. Education – Parents and guardians can gift money or property for their child's education and there is no limit on the amount of the gift(s) provided there is a reasonable basis for reporting these amounts. Documentation such as receipts and tuition payment receipts will provide a taxpayer with evidence of their claim(s) to the tax department if requested.

2. Employer-Employee Gifts – Gifts made from an employer to an employee, including bonus payments, gratuity, or pensions, must have a reasonable relationship between the employee's service and the value of any gift(s) made or will be made to the employee. In addition, payments made to dependents of deceased employees may comply with the same requirement.

3. Gifts from abroad (both NRIs and gifts in foreign currency) received from relatives abroad, such as parents and children's spouses, will typically be exempt from taxation in India. Non-taxable relatives of the recipient would be exempt from tax on any gifts received of INR 50,000 or less. For non-relatives, the limit is 50,000.

4. Aggregate Value of All Gifts Made Exceeding Rs 50,000 – Gifts are also assessed together to the extent they exceed Rs 50,000 for each recipient within one financial year. Thus, if at least one gift made to a third party from any non-related entity exceeds Rs 50,000 cumulatively during a financial year, then all gifts made during this time period would be subject to tax.

Taxpayers should take special note of these circumstances in order for taxpayers to comply with the requirements of the Tax Acts and not be penalised for not doing so, while taking advantage of the legitimate exemptions based upon the provided examples.

Rules and Compliance

Gifts made to individuals can incur taxation as gifts, and therefore it is important to have accurate reporting along with proper documentation for gifts to protect against audit or penalties. The taxable gifts are reported by the taxpayer as ‘income from other sources’ in their income tax return (ITR) in India.

1. How to Report Gifts

The taxpayer is required to report on their ITR the total value of all gifts received from non-relatives in excess of ₹50,000 during the financial year. The type of gift must be specified as cash, movable property or immovable property in order that the correct taxation treatment can be applied. The name of the donor, the relationship of the donor to the taxpayer (if any), and the contact information of the donor must be provided to ensure proper identification of the donor by the government.

2. Document to Retain

The taxpayer should retain the following documents for each high-value gift:

• Gift deed (a legal document that specifies the terms and conditions of the transfer of the gift).
• Proof of the relationship of the taxpayer to the donor (to qualify for exemptions for gifts received from relatives).
• Valuation certificates (for valuation of assets such as jewellery and shares, and immovable property).
• Bank statement or expenditure receipt showing the transaction for cash gifted from a donor.
  

3. Tips for Avoiding Difficulty

Retain all of this evidence and documentation for a minimum of 6 years, as the income tax department may require proof of the gift.

If the gift is received from overseas, it is important that you retain evidence of any remittance made to pay for the gift, and that the remittance complies with the rules of the Foreign Exchange Management Act (FEMA).

If there is any concern regarding how to report a gift, it is recommended that you contact a tax accountant to confirm that the correct reporting occurs.

Accurate reporting of gifts received as gifts will allow gifts to be reported visibly, reduce the possibility of errors resulting in penalties and enhance the ability to qualify for exemptions. Without documentation, gifts can be a source of great frustration, even when large amounts of money are transferred as gifts.

Examples:

Gifting in India can get complicated, so here are some real-world examples of gift taxation that cover both money and property, as well as international gifts.

Money Gift by Friend:

Ravi receives ₹70,000 as a gift from his friend Amit during a fiscal year.

Tax Consequence: Because his friend is not considered a relative per income tax rules and his gift exceeds ₹50,000, the total of ₹70,000 is subject to tax as Other Income.

Money Gift by Relative

Priya is gifted her wedding gift of ₹1,00,000 by her brother as a part of her marriage.

Tax Consequence: A gift from a relative, on the occasion of marriage, is completely exempt from any tax under Indian tax law.

Gifting Moveable Property

Suman has jewellery with a Fair Market Value of ₹60,000 gifted to her by a friend.

Tax Implications: Since the gifted item's value exceeds ₹50,000 and she was not related to her gift giver, she will have to pay tax on the entire amount.

Gifting Immovable Property

Vijay receives a plot of land from his uncle with a stamp duty value of ₹3,00,000.

Tax Consequence: All gifts that are received from relatives, including his, are excluded from being taxed under Indian Laws.

Conclusion

The conclusion to our examination of gifts is that while they may represent an expression of love, milestone celebrations or a reward for one’s efforts, each one may or may not be liable for taxation. The taxation status will depend on various elements such as: who provided the gift, what type of gift was offered, what occasion was celebrated with giving the gift and the total aggregate value of gifts that were received during the financial year.

Gifts received by relatives, gifts given at the time of marriage, gifts from individuals making a bequest under a will, and gifts provided by charitable organisations are all generally exempt from tax. Gifts received from non-relatives that exceed ₹50,000 in aggregate during a financial year will be taxable in your return as "Income from Other Sources". It is also important to note that movement (or transfer) of assets is taxable if their aggregate value exceeds specified taxation limits, regardless of whether they are classified as movable property or immovable property, and foreign gifts have their own rules as well. Therefore, you will want to develop the necessary record keeping through support documents (gift deed, valuation and proof of relationship) to substantiate any exemption from tax you will claim related to gifts and to avoid any disputes with the taxing authorities.

By understanding the rules of taxation surrounding gifts, you may be able to give and receive gifts with fewer concerns regarding unintentional tax liabilities. Moreover, Prosperr.io has tools available to help you monitor and record your gifts, automate calculations and remain compliant so that you may focus on ensuring that your gifts will be properly distributed while also planning for your taxes, rather than worrying about filling out forms and other related paperwork.

Book a Free Tax assessment call with us today!

Frequently Asked Questions:

1. Are gifts for education or from employers taxable?

Gifts for education and reasonable gifts from employers (bonus, gratuity, pension) are generally exempt, provided they are justified to the assessing officer.

2. Can non-residents gift property in India?

Yes. NRIs can gift movable or immovable property in India. Gifts to relatives in India are tax-exempt, provided FEMA regulations are followed. Gifts to non-relatives are taxable if above ₹50,000.

3. Are gifts from employers in the form of stock options taxable?

Yes. Stock options or shares granted as part of employee benefits are generally exempt only if reasonable and recognised as part of a bonus or service recognition. Excess or irregular grants may be taxable.