Gift Tax

CA Manish K Dhoot (CA, B. Com, NCFM, CPCM) (5015 Points)

10 August 2010

Gift Tax In India

Gift tax is history, or rather, was history.
Financial act 1998 had deleted gift tax act w.e.f.1.10.98. consequently, all gifts made on or after 1.10.98 are free from gift tax. Neither the donor nor the donee would have to pay any tax. Financial act 2004 has revived it partially, but it is in the form of donee-based income tax instead gift.

The clubbing provisions in the Income Tax Act 1961 and Wealth Tax Act, 1957 are not deleted. Therefore, income and wealth from assets transferred directly or indirectly without adequate consideration to minor children, the spouse (otherwise than in connection with an agreement to live apart) or daughter-in-law will continue to be deemed income and wealth of the transferor. Same is the case when assets are held by a person or an Association Of Persons for benefit of assesses, the spouse, daughter-in-law and minor children.

Gift tax was not applicable to gifts of movable property situated in Jammu and Kashmir. Now, that the Gift Tax Act, 1958 is abolished, the clubbing provisions would be applicable to gifts of movable properties in J&K also.

The Gift tax in India is regulated by Gift Tax Act that was constituted on April 1, 1958. It came into effect in nearly all parts of the country except Jammu and Kashmir. As per this Act 1958, all gifts exceeding Rs. 25,000, in the form of cash, draft, check or others, received from one who does not have blood relations with the recipient, were taxable.

However from October1, 2009, individuals receiving shares or jewellery, valuable artifacts, valuable drawings, paintings or sculptures or even property valued over Rs 50,000 as gifts from non-relatives, shall have to start paying tax.

Gifts are Taxable Only in the Case of Individuals and HUFs

U/s 56(2) (vi) certain gifts are taxable according to income tax as "income from other sources". However, this provision applies only for individuals & Hindu Undivided Families (HUFs). Thus, if gift is received by any Trust or A.O.P., then it shall not be liable to income tax as "income from other sources".

Minors
The entire income that arises or accrues to a minor is to be included in the income of that parent whose total income (excluding the income includible) is higher. When the marriage of the parent does not subsist, the income of the minor will be included in the income of that parent who maintains the minor child. Income arising in the succeeding year shall not be included in the other spouse unless the assessing officer is satisfied that it is necessary to do so.
Where the income of the individual includes the income of his minor children, an exemption up to Rs. 1,500 in respect of each minor child can be claimed by the individual u/s 10(32).
Where a minor is admitted to the benefits of the partnership firm, the value of the interest of such minor in the firm shall be included in the net income of the parent of the minor. All the income of physically or mentally handicapped minor child will be directly assessed in the hands of the child. Similarly, a minor earning income by way of manual work or an activity involving application of his skill, talent or specialized knowledge and experience, is directly assessed in the hands of the child. Unfortunately, the income arising from his investments will suffer clubbing.

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Gifts And Clubbing In Gift Tax In India

The main advantage of gifts accrues from the fact that in the case of spouse or daughter-in-law, income on income is not clubbed. If the spouse has no other income, no tax is payable unless the interest on interest crosses the minimum threshold of Rs. 50,000. In other words, instead of investing in your own name, and pay tax thereon, it is better to give a gift, pay tax on the original corpus gifted and keep on building a corpus for your spouse. Yes, it is cumbersome to keep track of what is clubable and what is not but may be worth the effort. Unfortunately, this strategy cannot be used in the case of minors since their entire income, including interest on interest, is clubbed in the hands of the parent having higher income than that of the other. There is a small solace in the form of exemption of Rs. 1,500 per child on income earned by the child. More the number of children better is the advantage. Forget family planning.

Tips To Avoid Clubbing.

Gifts under a will or in contemplation of death do not attract stamp duty. According to section 191 of the Indian Succession Act (ISA), Gifts can be made in contemplation of death by a person who is ill and expects to die shortly delivers to another the possession of any movable property (Not immovable) as a gift in case he dies. Such a gift may be revoked by the donor if he recovers from the illness.

Are you (or your son) intending to get married in a near future? A good idea is to give a fiancÃ©e a handsome gift before the marriage. Even the first stage interest will not be taxed in your hands.

Suppose you do not have enough funds to invest the maximum amount necessary to bring down your taxes in avenues covered by section 88 and also take advantage of the freedom from the tax. You can contribute up to 69,500 every year to a PPF account in the name of the child, major or minor and only Rs. 500 to your own account. It is treated as gift but the associated clubbing provision is rendered toothless, since the interest on PPF is tax-free.

Notwithstanding all this, it is necessary to ensure that if you have any minor children, you earn an income of at least Rs. 1,500 for each of them. Income up to that level is free form income tax.

You may gift you wife (or daughter-in-law) shares of companies, which are announced bonuses. The capital gains on bonus escape clubbing whereas the loss on original holding arising out of the bonus is welcome for the clubbing. Even the dividend is charged on tax, if it is taxable, in her hand and not his.

In a far-reaching judgment, the Delhi High Court in the case of R. Dalmis v CIT (1982) 133ITR149 has held that savings made by the wife out of house hold expenses given by her husband would be separate property of the wife. Any income arising there-from cannot be aggregated with the income of the husband.

If you insist on giving a gift, give it through will.

Finally, and this would surprise you most, the best method of avoiding clubbing is not to give a gift at all! It has now become possible to keep the title of the money to yourself, earn income through long-term capital gain and yet avoid tax by using section 54EC or 54ED. Another method is to use equity-based schemes of mutual funds, which are tax efficient. We shall deal with these later. These strategies can be applied, irrespective of the size of the capital. So, do not split it.

Gifts from relatives are Tax-Exempt

Any gift received from relatives of any amount during financial year is completely exempt from tax. Hence, it's crucial to understand the meaning of the expression 'relative' for this purpose. Explanation to Sec. 56(2) (vi) provides that the expression "relative" means:

Spouse of the individual;

Brother or sister of the individual;

Brother or sister of the spouse of the individual;

Brother or sister of either of the parents of the individual;

Any lineal ascendant or descendant of an individual;

Any lineal ascendant/descendant of spouse of the individual

Gift of more than Rs. 50,000/- can be received from below mentioned relatives without any taxes

Tax-Smart 1: Exemption for Marriage Gifts

Any gift received from any person on occasion of marriage of the gift's recipient will not be liable to income tax at all. Also there is no monetary limit attached to this exemption, which is provided by Section 56(2) (vi).

Tax-Smart-2: Tax-Exempt Gifts from Other Persons

Besides gifts received from relatives or on occasion of marriage, following are the other gifts which are completely tax-exempt as provided in Section 56(2)(vi) of the I.T. Act:

Gift received from a Will or by way of inheritance;

Gift received in contemplation of death of the donor;

Gift from a local authority;

Gift received from any fund, foundation, university or other educational institution or hospital or any trust or any institution referred to in Section 10(23C); and

Gift received from any trust/institution, which is registered as public charitable trust or institution u/s 12AA.

Tax-Smart 3: Gifts in Kind are Tax-Exempt

Provisions relating to the taxation of gifts from non-relatives & non-specified persons in excess of Rs. 50,000 will be liable to income tax only when the gift is sum of money, by way of cash, cheque or a bank draft. Gifts in kind like a gift of shares, gift of land, gift of house, gift of units or even mutual funds, jewellery, etc. shall not be liable to any income tax at all.