Our ex-Miss Duniya, Mrs. Cashwarya Bachpan got a GIFT of Rs.25 crores from Mr. Amitaap Bachpan on the occasion of her wedding bells with the Dollywood heartthrob Kabhi-shake Bachpan. Bachpan family had already been in news due to the various notices issued to them by the Income Tax Department. Now what do you think, will Cashwarya also get notices from the Department or will she pay the tax on the GIFT received from her father-in-law??? Lets look into the matter closely n analyze its repercussions from income tax angle.

The above-mentioned transaction will be governed by sec 56(2)(vi) of the Income Tax Act dealing with Income From Other Sources.

Any Sum/money received without consideration commonly known as “GIFT”, is now brought within tax brackets. History talks about the taxability of gifts however, it did not succeed as expected and hence it was not made into law. Later, in 2004, Finance Minister Mr. P Chidambaram brought back “tax on gifts” through the backdoor by treating certain gifts as income of the recipient/donee and recovering the income tax on such amounts of gift received. Thus, we now have income tax on the sum of money received with effect from 1^st September 2004 as gifts from non-relatives.

Accordingly, gifts received from a non-relative are included as income under section 56(2)(v) of the Income Tax Act with effect from 1^st September 2004. However, the basic exemption of Rs.25,000/- is raised to Rs.50,000/- from the 1^st of April 2006 u/s 56(2)(vi).The provision of section 56(2)(vi) is as follows:

“Where any sum of money exceeding Rs. 50,000/- is received without consideration by an Individual or a HUF from any person on or after 1^st April 2006, the whole of such sum is taxable under the head “ Income from other sources” provided that this sum is not received from

1.        A relative; or                                     

2.        On the occasion of the marriage of the individual ;or

3.        Under a will or by way of inheritance or;

4.        In contemplation of death of the payer; or

5.        Any Local Authority referred to in sec 10(10); or

6.        Fund/Foundation/University/Educational Institution or Hospital or other Medical Institution or Trust referred to in sec 10(23C); or

7.        Trust/Institution registered u/s 12AA; or

8.        Any sum of money received by way of consideration.

The word “relative “is of great importance and has to be understood in the right sense.

Lets consider Mr. X as an individual assessee for better understanding of term Relative under this section. Relative means

                 1) spouse of  Individual (Mrs. X)

                 2) Brother or Sister of Individual & their Spouse (Brother or Sister of Mr. X)

                 3) Brother or Sister of the spouse of Individual & their Spouse (Brother or Sister of Mrs. X)

                 4) Brother or Sister of either of the parents of the Individual & their Spouse

                 5) Any lineal ascendant or descendant of the Individual & their Spouse

                 6) Any lineal ascendant or descendant of the spouse of the Individual & their Spouse.

The meaning of relative above may confuse some and some may not understand. For benefit of those who didn’t understood or those who are confused below is the chart explaining the mean of relative as contemplated by this section, have look and you’ll appreciate how simple it is.

The purpose of the provision is to tax primarily gifts from non-relatives including friends from abroad. This basic exemption of Rs.50,000/- on gifts received is raised with effect from 1^st April 2006.

Following are few examples, which would make the above provision clear, for the A.Y 2008-2009

1.        Mr. X with salary of Rs.5,00,000/- receives  gifts during the financial year ending 2008 as under:

a)        Rs.75000/- from his friend

b)       Rs. 2 lakhs from his father

c)        Rs. 5 lakhs from his father in law

Tax Liability: 

Out of the above gifts, only the gift of Rs.75,000/- from his friend is taxable as income u/s 56(2) (vi) while other two gifts are exempt as gifts from close relatives within the meaning of the section. However, the whole of the sum of Rs.75,000/- will be chargeable as income and the entire amount of Rs.75,000/- would be included in Mr X ‘s income and taxed. In other words, there is nothing like basic exemption of Rs.50,000/-.

Thus, the entire amount of Rs.75,000/- and, not just the Rs.25000 i.e (excess of Rs.50000/- limit) would attract income tax.

Thus the income tax on Rs.5,75,000 for accounting year ending March 2008 is Rs. 1,25,145/- while on Rs. 5,00,000/- i.e the amount of income tax prior to gift is Rs.1,01,970/- thereby income tax on gift of Rs.75,000/- in Mr. X’s case is Rs.23,175/-.

 Though the Act provides for basic exemption on gifts received to be Rs 50,000/- but actually it is not. The tax liability is calculated on the whole amount on gifts received but not on the amount exceeding Rs 50,000/-

2.        Say an Individual Mr. Y (having income of Rs.100,000/-) received total Rs.49,000/- as gift from a friend during the financial year, the amount is not taxable as it is below exemption limit of Rs.50,000/-. Now suppose Mr. Y receives gift worth Rs.2,000/- from  another friend the impact will be that Mr. Y has to shell out Rs.4,326/- by way of taxes . If he hadn’t received Rs.2,000/- nothing would be taxable as Rs.49,000/- would not be added to 100,000/- but if he receives Rs.2,000/- the total of Rs.51,000/- will be added to Rs.100,000/- increasing his taxable income to Ra.1,51,000/- and tax payable would be Rs.4,326/- i.e. (4,200+126).

Other points, which have to be given attention with respect to “GIFT”, are pointed out briefly:-

1)       Gifts in kind are not covered by the aforesaid provision.

2)       The above provision does not apply if money, without consideration is received by a firm, a company, AOP, BOI as it covers only Individual/HUF.

3)       The provisions are applicable whether the recipient or donor are “Resident or Non-Resident” of India.

It is to be noted that “on the occasion of marriage”, does not only indicate on the day of the marriage but either at the time of or about the time of marriage, marriage being the reason for the gift.

Though gifts are not liable to tax in law, but where there are amounts received, they are required to be proved under section 68 (Cash Credits in the books of accounts) as bona fide gifts. If they are not so established, they will be treated as income.” Gifts in kind” could also be similarly treated as unexplained investment under section 69. The burden of proof, even otherwise would ordinarily lie on the taxpayer, since he alone is in possession of all the relevant facts.

NO!!!! GIFTS received need not really be a costly affair…………….

Hence we can conclude that Cashwarya might have not got any notices from the Department 

Nor she might have paid any taxes on it………

But considering the above example of Mr. Y we can also conclude that it might sometimes prove costly when received from non-relatives.

For clarifications on Relatives please refer to the table below.