Taxation of Gifts under Income Tax Act, 1961

BACKGROUND

Gifts have always been a topic of hot discussion as far as income tax laws in India are concerned. We have experienced a lot of changes in taxability of gifts. It is said that 'necessity is the mother of inventions', so I quote that 'loop hole is the mother of amendments'. Because of various lacunas and loop holes, the income taxation of gifts in India has undergone lot many changes.

These include abolition of Gift Tax Act, changes in limit of gifts accepted from per person to a blanket limit, including gift of immovable properties in tax bracket, etc.

This gives rise to a need for a detailed study the income taxation of gifts in India.

WHAT IS A GIFT?

The dictionary meaning of gift is 'a thing given to someone without payment.'

Section 122 of Transfer of Property Act, 1882 defines Gift as 'the transfer of certain existing movable or immovable property made voluntarily and without consideration, by one person called donor, to another, called donee, and accepted by or on behalf of the donee.'

If we analyze this definition, we get the following essentials of a gift.

- There must be transfer of ownership
- The ownership must be of a property in existence
- The property can be movable or immovable
- The transfer must be without consideration
- The transfer must be voluntary
- The donor must be a party competent to contract
- The donee must accept the gift

So, a gift will be complete only if all the above conditions are satisfied.

Gift has nowhere been defined under the Income Tax Act, 1961. However, section 56(2)(x) mentions certain moneys and properties received by assessee as taxable in the hands of receiver. These receipts of moneys and properties without any consideration can be construed as gift received by the assessee.

SECTION 56(2)(x)

Section 56(2)(x) of the Income Tax Act, 1961 reads as under:

Where any person receives, in any previous year, from any person or persons on or after the 1st day of April, 2017,—

(a) any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum;

(b) any immovable property, -

(A) without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property;

(B) [for a consideration which is less than the stamp duty value of the property by an amount exceeding fifty thousand rupees, the stamp duty value of such property as exceeds such consideration:]*

Provided that where the date of agreement fixing the amount of consideration for the transfer of immovable property and the date of registration are not the same, the stamp duty value on the date of agreement may be taken for the purposes of this sub-clause:

Provided further that the provisions of the first proviso shall apply only in a case where the amount of consideration referred to therein, or a part thereof, has been paid by way of an account payee cheque or an account payee bank draft or by use of electronic clearing system through a bank account, on or before the date of agreement for transfer of such immovable property:

Provided also that where the stamp duty value of immovable property is disputed by the assessee on grounds mentioned in sub-section (2) of section 50C, the Assessing Officer may refer the valuation of such property to a Valuation Officer, and the provisions of section 50C and sub-section (15) of section 155 shall, as far as may be, apply in relation to the stamp duty value of such property for the purpose of this sub-clause as they apply for valuation of capital asset under those sections;

(c) any property, other than immovable property, -

(A) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property;

(B) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration:

Provided that this clause shall not apply to any sum of money or any property received -

(I) from any relative; or

(II) on the occasion of the marriage of the individual; or

(III) under a will or by way of inheritance; or

(IV) in contemplation of death of the payer or donor, as the case may be; or

(V) from any local authority as defined in the Explanation to clause (20) of section 10; or

(VI) from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10; or

(VII) from or by any trust or institution registered under section 12A or section 12AA; or

(VIII) by any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10; or

(IX) by way of transaction not regarded as transfer under clause (i) or clause (iv) or clause (v) or clause (vi) or clause (via) or clause (viaa) or clause (vib) or clause (vic) or clause (vica) or clause (vicb) or clause (vid) or clause (vii) of section 47; or

(X) from an individual by a trust created or established solely for the benefit of relative of the individual.

Explanation. For the purposes of this clause, the expressions "assessable", "fair market value", "jewellery", "property", "relative" and "stamp duty value" shall have the same meanings as respectively assigned to them in the Explanation to clause (vii).

{* This sub clause shall be substituted by Finance Act, 2018 with following words w.e.f. 1st April, 2019

For a consideration, the stamp duty value of such property as exceeds such consideration, if the amount of such excess is more than the higher of the following amounts, namely:—

(i) the amount of fifty thousand rupees; and

(ii) the amount equal to five per cent of the consideration:}

SECTION 56(2)(x) - AN ANALYSIS

The sub clause (x) of clause (2) to section 56 was inserted by the Finance Act, 2017 w.e.f. 1st April, 2017. This clause defines taxability of amounts or properties received without any consideration. These are referred to as 'gifts' in common parlance. Accordingly, the following amounts are taxable. However, these amounts are subject to exceptions that are mentioned thereafter.

1. Whole amount of money received (from person or persons), if it exceeds Rs. 50,000.

If a person receives from any other person or persons amounts exceeding Rs. 50,000 in aggregate, then entire such sum is taxable. This limit is not per payer but in aggregate. Also, point is to be noted that the amount of Rs. 50,000 is not a threshold exemption, but a maximum limit exceeding which the entire amount becomes taxable.

So, if a person receives Rs. 25,100 and Rs. 25,000 from two different persons, then as the aggregate amount being Rs. 50,100 exceeds Rs. 50,000 the entire amount of Rs. 50,100 is considered as taxable income charged under income from other sources. The same principle applies to other sub clauses under section 56(2)(x).

2. The stamp duty value of an immovable property received without any consideration, if such value exceeds Rs. 50,000.

If a person receives from another person or persons, any immovable property without any consideration, and the stamp duty value of such property exceeds Rs. 50,000 in aggregate, such entire amount becomes taxable. This provision relating to gift of immovable property was introduced w.e.f. 1st October, 2009.

Whereas, in case of amount of money received or property other than immovable property is received, the aggregate of the amount received during the year is considered for the limit of Rs. 50,000, in case of an immovable property, the limit of Rs. 50,000 is counted separately for each property.

3. The differential amount in the stamp duty value and actual consideration of an immovable property where the actual consideration is less than the stamp duty value, and the difference in such value exceeds Rs. 50,000.

If a person receives from another person or persons an immovable property where the consideration paid for the same is less than the stamp duty value and such difference is more than Rs. 50,000 then entire such difference is considered taxable.

This creates a practical difficulty in cases where the fair market value of the immovable property is less than the stamp duty value of the said immovable property. In such cases, the assessees may face hardship as the amount becomes taxable despite not in the nature of income (gift).

However, to avoid this difficulty, the third proviso states that in such cases, the assessing officer may refer the case to valuation officer for assessing the fair market value of the property. This proviso is a relief to assessees in bonafide cases.

Another difficulty comes in case of properties with huge valuation and the consideration so paid in marginally less than the stamp duty value but more than Rs. 50,000. For example, a property having stamp duty value Rs. 5 crores, is purchased for a consideration of Rs. 4.80 crores. In this case the difference is marginal however more than 50,000.

This difficulty is removed by Finance Act, 2018 w.e.f. 1st April, 2019 where the difference if less than 5% of consideration shall not be taxable.

4. The fair market value of any property, other than immovable property, received without any consideration, if such value exceeds Rs. 50,000.

If a person receives any property, other than an immovable property, from another person or persons, the aggregate value of which exceeds Rs. 50,000 then the entire of such value of the property so received becomes taxable. This provision has been introduced w.e.f. from 1st October, 2009.

5. The differential amount in the fair market value and actual consideration of any property, other than immovable property, where the actual consideration is less than the fair market value, and the difference in such value exceeds Rs. 50,000.

If a person receives from another person or persons any property, other than an immovable property, where the consideration paid is less than the fair market value of such property and such difference exceeds Rs. 50,000, the aggregate of such difference becomes taxable.

Following are some illustrations on the above provisions.

1 - Introduced by Finance Act, 2018 applicable for transactions entered into after 1st April, 2019.

EXCEPTIONS

The aforementioned provisions are subject to certain exceptions. The amounts received from following persons or on following occasions are exempt from tax even received without sufficient consideration.

1. From relatives: If any amounts of money or property are received from relatives of the individual, such amounts are exempt from tax. The proviso to clause (vii) also mentions the list of relatives which is as under.

a. In case of an individual

i. Spouse of the individual
ii. Brother of the individual
iii. Sister of the individual
iv. Brother of the spouse of the individual
v. Sister of the spouse of the individual
vi. Brother of the either of the parents of the individual
vii. Sister of the either of the parents of the individual
viii. Lineal ascendant or descendant of the individual
ix. Lineal ascendant of descendant of the spouse of the individual
x. Spouse of above-mentioned persons

b. In case of a Hindu Undivided Family - its members.

In case of relatives of an individual, it is not necessary that the exemption is available reciprocally for all relatives. For example, amount received by the nephew from his uncle is exempt, but amount received by the uncle from his nephew is not exempt. So, utmost care is to be taken to ascertain the exemption status before determining the taxability of the transaction.

In case of a Hindu Undivided Family, amount received from its members is exempt. However, amount received by an individual from HUF is not exempt.[Gyanchand M. Bardia v. Income Tax Officer,(Ahmedabad - Trib.) 2018 ITL 1035]

2. On occasion of marriage: Amounts of money or property received by an individual on occasion of his / her marriage, without consideration are exempt. The exemption is simple but again care has to be taken to understand that such amounts or property received on occasion of marriage, and not before or after that, are exempt. For example, money or property received at the engagement ceremony, or received before or after marriage at any other occasion, etc. are not exempt.

Gifts received on occasion of marriage of child are not exempt at the proviso specifically mentions “on occasion of marriage of the individual” [Rajinder Mohan Lal v. Dy. CIT, Punjab and Haryana High Court, 2013]

3. Under a will or by inheritance: Amount of money or property received by a person under a will of a deceased person or are inherited by the person are exempt.

4. In contemplation of the death of the payer: If a person receives any money or property without sufficient or without any consideration from a payer in contemplation or his / her death, it is treated as not taxable.

5. From local authority: If any amount of money or property is received from a local authority defined under explanation to section 10(20) such receipts are exempt from tax.

6. From a fund, foundation, university, educational institution, hospital or medical institution referred to under section 10(23C): If any amount of money or property is received from the afore mentioned entities those are referred to under section 10(23C), such amount of money or property is exempt from tax.

7. From trust or institution registered u/s 12AA: If any amount of money or property is received from trusts or institutions registered u/s 12AA of the Income Tax Act, such amount of money or property is exempt from tax.

8. By way of transaction not regarded as transfer: If any amount money or property is received by way of a transaction that is not regarded as transfer pursuant to clause (vicd) or clause (vid) or clause (vii) of section 47, then such amount of money or property is not regarded as taxable.

The respective transactions not regarded as transfer are mentioned hereunder.

a. by a shareholder, in a business reorganization, of a capital asset being a share or shares held by him in the predecessor co-operative bank if the transfer is made in consideration of the allotment to him of any share or shares in the successor co-operative bank. (vicd)

b. any transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the demerged company if the transfer or issue is made in consideration of demerger of the undertaking. (vid)

c. any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share or shares held by him in the amalgamating company, if—

(a) the transfer is made in consideration of the allotment to him of any share or shares in the amalgamated company except where the shareholder itself is the amalgamated company, and

(b) the amalgamated company is an Indian company. (vii)

PROPERTY

For the purpose of section 56(2)(x), property means the following capital asset of the assessee, namely –

a. immovable property being land or building or both
b. shares and securities
c. jewellery
d. archaeological collections
e. drawings
f. paintings
g. sculptures
h. any work of art
i. bullion

Any other asset apart from the above-mentioned property is not considered as 'property' for the purpose of this section.

GIFT DEED

Following points are relevant with respect to gift deed.

1. The gift of an immovable property is complete only if it is done vide a gift deed and the same is registered and requisite stamp duty is paid.
2. The gift of a movable property or money doesn't require a gift deed. However, it is advisable to make a gift deed for movable property and money also.
3. The gift deed should also contain the acceptance of the receiver of gift as the gift transaction is not complete unless accepted by the donee.

OTHER POINTS FOR CONSIDERATION

Few other points of consideration in case of transaction of gifts are as below:

1. In case of gift of money received for Rs. 2,00,000 or above in cash, the penalty u/s 269ST shall get attracted.
2. The onus to prove the transaction of the gift lies on the receiver of the gift.
3. In case of gifts that are exempt owing to the proviso to section 56(2)(x), the existence, genuineness and credibility of the donor is also required to be proved and the onus is on the receiver to prove it.
4. The effect of other applicable laws like Registration Act, Stamp Duty Law, Transfer of Property Act, Goods and Service Act, and other relevant laws has also to be considered for respective treatment.

DISCLAIMER

The content of this hand-book is based on the interpretation of the author and is subject to difference of opinion with others. Care has been taken with respect to correctness the legal provisions mentioned herein. However, any errors or omissions are unintentional. The contents of the handbook should not be taken as opinion of the author for entering into any transaction.