What are the rules of Income Tax on Gift in India and how we can use exemptions and save tax on it? We often believe that if we gift money to a spouse, kids, family or friends then we can save tax. But the reality is something different.
Hence, try to understand the Income Tax on Gift in India.
What is the meaning of Gift?
A receipt of sum of money or property (immovable property like land or building or both, shares and securities, jewellery, archaeological collection, drawings, paintings, sculptures or any work of art or bullion) without consideration or without inadequate consideration is called as Gift.
Here two parties are involved and they are as below.
# Donor- A person who is giving the gift.
# Donee- A person who is receiving the gift.
What types of assets you can gift?
Cash or Money
The gift can be in the form of cash or money.
Movable Assets / Property
Shares and securities, jewellery, archaeological collection, drawings, paintings, sculptures or any work of art or bullion Gold bars, Silver bars etc.,
Land or building or both (does not include agricultural land in the rural area).
Other than these
If you gift any other assets other than the assets listed above, then they are not considered as gift for income tax purpose.
What are the Income Tax Benefits for the donor by gifting?
Many individuals feel that by donating their money or property, they can save tax. This I feel the biggest myth. Just keep it in mind that there will no tax benefits by donating the money or property. If that was the case, then say Mr.X earning is Rs.10 lakh a year. He may donate Rs.2.5 lakh to his wife and Rs.5 lakh between his two kids to show his tax liability as ZERO.
What are the Income Tax Benefits for the donee by receiving the gift?
There are many scenarios of receiving the money or property from the donor. Let us discuss the same in detail.
# Gift received up to Rs.50,000 in a year is not taxable
If aggregate amount of sum of money or property (immovable property like land or building or both, shares and securities, jewellery, archaeological collection, drawings, paintings, sculptures or any work of art or bullion) received by an individual/HUF without any consideration from one or more persons during a financial year not exceeds Rs.50,000, then it is not taxable income.
Let us say Mr. A received some gift from his from Mr.X and value is Rs.25,000 and another gift from Mr.Y valuing Rs.20,000. Then his total gift received is Rs.45,000 (which is less than Rs.50,000). Hence, it is not taxable to Mr.A.
However, if Mr.A received another gift from one more friend Mr.Z within a same of valuing Rs.10,000, then his total gift value within that financial year is Rs.55,000. This is more than the limit of Rs.50,000.
In such scenario, the whole Rs.55,000 is taxable income to Mr.A (but not the only exceeding amount of Rs.5,000).
# Gift received from relatives is not taxable
Gift of money or property received from a relative is not taxable income for the receiver or donee. For this purpose, the meaning of relative is as below. The list is big one, but I will give a complete list.
- Brother’s Wife
- Sister’s Husband
- Spouse’s Brother
- Spouse’s Brother’s wife
- Spouse’s Sister
- Spouse’s Sister’s husband
- Spouse’s Father
- Spouse’s Mother
- Spouse’s Grand Father
- Spouse’s Grand Mother
- Spouse’s Great Grand Father
- Spouse’s Great Grand Mother
- Mother’s Brother
- Mother’s Brother’s Wife
- Mother’s Sister
- Mother’s Sister’s Husband
- Father’s Brother
- Father’s Brother’s Wife
- Father’s Sister
- Father’s Sister’s Husband
- Grand Father
- Grand Mother
- Great Grand Father
- Great Grand Mother
- Son’s Wife
- Daughter’s Husband
- Grand Son
- Grand Son’s Wife
- Grand Daughter
- Grand Daughter’s Husband
You notice that there is no limit for the gift value. Therefore, whatever the value of the gift you receive from your relatives is not taxable income.
However, let us Mr.X donate Rs.1 lakh to his wife Mrs.X. Then for Mrs.X, the amount is not taxable. But what if she invests this Rs.1 lakh and earns Rs.10,000 on this in a year? Is it the income of Mr.X or Mrs.X? In such situation clubbing of the income provisions will come into the picture.
Let me try to explain the same from below image.
Hope you now have clarity about the clubbing of income rules when you receive the money from the relatives.
# Gift received during wedding is not taxable
Gift received by an individual from relative or non-relative during and individual’s wedding is not taxable. Here, an individual means a specific individual, whose marriage is solemnised.
Note that there is no limit of value. Hence, it may be Rs.50,000 or any amount, it is not taxable. Also, this gift may be either from relative or non-relative. The whole such gift is not taxable to you.
# Money received by the way of WILL/inheritance
If you receive the money or property by the way of WILL or inheritance, then it is also not considered for taxable income. Hence, if you receive the money or property worth of Rs.1 Cr from WILL or inheritance, then it is not taxable income for you.
# Movable property as a Gift
There are two conditions here. One is with consideration (which is less than the fair market value) and another is without consideration. Consideration means you will be paying some value for getting that gift. Movable property means shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures or any work or art and bullion.
- Without consideration-If the aggregate fair market value of movable property received without consideration and value of such received is less than Rs.50,000 means it is not taxable income. If it is more than Rs.50,000 then the fair market value of the property will be chargeable to tax.
- With consideration (which is less than the fair market value)-If movable property received for a consideration which is less than the fair market value of the property and amount exceeding is Rs.50,000, then the difference between fair market value and the consideration is chargeable to tax.
Therefore, not that if you received a movable property like TV or Car as a gift, then it is not considered as taxable income for you.
# Immovable property as a Gift
Here, again there are two conditions. One is with consideration (less than the stamp duty) and another is without consideration. Immovable property means land or building or both (does not include agricultural land in rural area).
- Without consideration- If any immovable property is received and the stamp duty value of which is less than Rs.50,000, then it is not taxable income. However, if it is more than Rs.50,000, then stamp duty value will be chargeable to tax.
- With consideration- If any immovable property is received for a consideration which is less than the stamp duty value of the property and amount is exceeding Rs.50,000, then the difference between stamp duty value and consideration is chargeable to tax.
Apart from above examples, there are few other types of gifts which are fully exempt from tax and they are as below.
- Gift received under a willor by way of inheritance.
- Gift in contemplation of death of the donor.
- Gift from any local authority.
- Gift from any fund or foundation or university or other educational institution or hospital or any trust or any institution referred to in Section 10 (23C).
- Gift from any trust or institution, which is registered as a public charitable trust or institution under Section 12AA.
How to show the Gift income while filing IT Return?
You no need to show the gifts which are less than Rs.50,000, gifts received by relatives or gifts during marriage under the head of “Income from Other Sources”. Because it does not fall under the definition of Income chargeable to Tax.
However, if you received the property through registered property deed or your PAN is quoted during transaction, then you have to show the value of the gift received as EXEMPT INCOME while filing ITR.
Documentation of Gift
It is always a best practice to document the gift transactions to avoid the future ambiguity of taxation. If you gifted by cheque or cash or any other movable assets, then registration or stamped the gift is not required. In a plain paper, you can write it and keep it for your reference.
For the 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.
Tips to save Income Tax on Gift in India
Now let us discuss on the ways to save Income Tax on Gifts in India.
# Invest in the tax-exempt instrument in the name of spouse
If you invest in any tax-exempt instruments in the name of spouse , then the profit will be clubbed in your name as tax-free income. Again any investment done from such tax-free income is the considered under the head of donee.
Let us say Mr.X donated Rs.20 lakh to his wife Mrs.X. She invested this money in tax-free bonds or equity mutual funds. Income earned from equity mutual funds after a year is tax-free. Let us say after 5 years, the value of the investment is Rs.30 lakh. This Rs.10 lakh profit will be tax-free income in the hand of Mr.X. However, any further earnings of this Rs.10 lakh will be treated as income of Mrs.X.
The same rule can applicable to tax-free bonds or the products like ELSS. In ELSS you have to invest in your spouse name. Then the rules of equity mutual fund as explained above will be applicable to ELSS funds also.
# Invest in the name of parents
Just use the clubbing of income rules, where parents income will not be treated as income of your’s. Hence, you can gift to your parents. Any earning from such investment is directly calculated under their head, but not considered for you.
For example, Mr.X gifted Rs.20 lakh to his parents Mr.A and Mrs.A. Income generated from Rs.20 lakh will be considered as the income of Mr.A and Mrs.A, but not the income of Mr.X. Hence, if your parents’ income tax liability is less than your’s then you can easily save some tax by donating to parents.
# Invest in the name of major kids
Clubbing of income will be applicable to minor kids but not to major (kids who completed 18 years of age) kids. Hence, by gifting to major kids, you can avail the same tax benefits as I explained about donating to parents.
But do remember that gifting to your parents or major kids will be hepful to you when they don’t have taxable income or their tax liability is less than your. Otherwise, it is just a headache to manage the tax part without any gain.
How the valuation of Gift is calculated?
# For all Immovable Property-Stamp duty value of the property.
# For Jewellery, archaeological collections, drawings, paintings, sculptures or any work of art-
- If purchased from the registered dealer, then the invoice value of these properties will be considered as fair market value.
- In all other cases, the assessee must obtain the report of registered valuer in respect of the price it would fetch if sold in the open market on the valuation date.
# For Quoted Shared and Securities-The transaction value as recorded in such stock exchange.
# For quoted shares and Securities but not received through recognized stock exchange-Lowest price of such shares and securities quoted on any recognized stock exchange in India on the valuation date.
Hope I covered all major points related to Income Tax on Gift in India.