written by | May 9, 2022

How Are Gifts Taxed in India?

Gifts we receive are tax-deductible under regulations in the Income Tax Act. However, the income tax did not apply to gifts before 2003-04. In 2004, modifications were implemented to the Income Tax Act to ensure that gifts were tax-deductible. 

Presently, any sum that an individual or a HUF receives worth over ₹50,000 during a fiscal year from a non-related individual, either in cash or using credit, will be considered income. We will look at the repercussions of tax on gifts to income. 

Income tax is inapplicable to gifts from relatives (meaning the word "relative" we've already described within this post). Friends aren't relatives, according to the Income Tax Act. Therefore, if your friends give you something that exceeds the threshold of ₹50 thousand is subject to tax.

Did you know?

According to law, you can't receive more than ₹2 lakhs or more in cash from another person within a single transaction. Tax experts advise you to limit your cash gifts to ₹2 lakhs.

What Is the Gift Tax in India?

Let's start with knowing the gift tax meaning. The gift tax is an income tax on gifts of large amounts that prevent massive transfers of wealth. Also, it ensures that there are not any tax consequences. This is a transfer tax, and the government doesn't count it as income tax, and the tax doesn't affect property and monetary gifts.

As per the tax law in force, anyone (donee or recipient) receives a lump sum of money or an immovable asset or other property that any other person (donor) specifies without the benefit of the amount of consideration. This means the gifts that are lesser than their fair market value or the stamp duty value of an immovable asset are taxable on the donation amount.

In this context, "property" refers to immovable property that includes buildings, land, shares, securities, jewellery, archaeological collections, sketches, sculptures or paintings, all works of art, bullion and art, etc.

Also Read: Taxable Income: What is it, and How Can You Reduce It?

Who Pays the Tax on Gift Money?

You don't need to worry about paying taxes on gifts that you receive from family members. The person giving the gift and not the recipient who files the tax return on gifts and, if applicable, pays the tax on gifts.

In most cases, it's quite clear that a gift has been given - any time you transfer something valuable between one individual to the next. However, someone transfers the gift in certain situations but does not consider it actual. For example, if, for instance, you give an item to your child, it is a tax-deductible exchange. 

The only person you can give a gift to without tax implications could be the spouse. It is also possible to consider something an offer even if the recipient partly pays for it. Suppose a couple decides to sell their house to pay their adult son an amount of ₹15,00,000

However, their fair market price for the house is, in fact, ₹25,00,000. Now, even though the child has paid the difference of ₹10,00,000 between the purchase price and fair market value, this amount comes under tax-payable. 

The positive side is many gifts will not be tax-free. This includes:

  • Medical or tuition expenses that someone else paid
  • Give gifts to your spouse.
  • The giving of gifts to a political organisation
  • Donations to charities

How Do We Calculate the Gift Income Tax?

According to the rules under Section 56(2) in the Income Tax Act, gifts come under tax-payables in India in the following situations:

  • They are taxable if gifts with a value greater than ₹50,000 are accepted in a fiscal year without consideration.
  • Immovable property like buildings, land or even more than ₹50,000 without any consideration during the financial year is tax-deductible as per its stamp duty cost.
  • Other than immovable properties like drawings, shares, jewellery and so on, you receive that exceed ₹50,000 are taxable.
  • It is taxable to receive property other than the immovable property with consideration. Also, it is equitable to the market value exceeding ₹50,000.

All gifts given to a recipient will be credited to the recipient's income during the year and are taxed according to income tax laws. Certain elements play into the equation when you receive one or more things as a present.

The first one is, of course, that of the value for stamp duty (in the case of immovable property) or the fair market price (in the case of movable property) of the donation. If the value is less than ₹50,000, one is exempt from paying a gift on tax, and the same applies if the gift was in cash.

If, however, the value of the present exceeds ₹50,000, the whole amount is tax-deductible under gift tax rules. The IT department looks upon it as income within the possession of the person receiving it. 

There is also the question of whether there was consideration or not. Suppose there was consideration and the amount of the gift is greater than the amount of ₹50,000. The amount for consideration is subtracted from the value, and the resultant amount is tax-deductible as per the gift tax laws. Also, learning about debit and credit is important if you intend to open a gift shop business.

Are There Any Exemptions in the Gift Tax?

Absolutely. Some situations allow gifts over ₹50,000 to be exempt from the standard gift tax rules. Here are a few of the most crucial examples:

  • The recipient doesn't have to pay tax on gifts when they receive a gift from their relatives. However, the term relative is strictly defined in income tax terminology. It does not have to include members who are typically not your relatives, but you consider them so.
  • For example, suppose you're an engineer working in software in Mumbai with monthly wages. However, you also get PF contributions from your employer. Additionally, you also own an apartment that you've been renting out and are also able to trade shares and gain on the profits.
  • You don't need to pay any taxes on gifts if you get an item through inheritance or will.
  • Also, you are exempt from taxation on gifts when you receive property or money from a foundation, educational institution or trust.

Things to Consider When Saving Tax on Gift Money in India

  • If the gift-giver and the recipient are not related, the maximum tax-free amount for transfer is ₹50,000. If the gift value is higher than this, then the entire amount and not just the excess amount is tax-deductible per the recipient's tax bracket.
  • Any gifts of any size you receive or give to relatives, including parents, brothers of your parents, spouses or your spouse's siblings and lineal descendants, are completely tax-free.
  • To know how to lower your income tax by giving gifts, you need to be aware of another term - "Clubbing". Tax experts say that if you give your partner or children some quantity, the amount will be immediately exempt from tax. This leads us to our next topic.

Also Read: Know About Paying Taxation of Income Earned From Selling Shares

A Good Example of 'Clubbing'

Imagine you earn an income per year that is ₹10 lakhs. You gift cash ₹1 lakh of it to your wife, but you can't claim that your tax-deductible revenue is ₹9 lakhs. Taxes must be paid per your tax bracket for the total amount of ₹10 lakhs

Now it is the case that the ₹1 lakh gift amount isn't considered income tax-deductible for your wife. If your wife puts that money in an account at the bank, the interest earned from the FD is a tax-deductible income, not that of your wife but you. 

This is known as 'clubbing ', which is identical if the amount is given to your minor child. Immovable or movable, in case you receive property as a gift, but for an insufficient amount of money, that difference between the amount of consideration and stamp duty is taxable income. 

For instance, if you receive an apartment valued at ₹60 lakhs and paid ₹30 lakhs, the rest of the ₹30 lakhs will be considered a tax-deductible gift.

Conclusion

In the normal course of things, cash gifts that exceed ₹50,000 are not tax-exempt for the person who received them. But, this threshold amount is not applicable if the cash gift comes from a particular family member.

In the case of a cash gift from a husband, there is no limit to the amount of cash the husband can donate with no tax consequences. You can give anything to your wife without any tax consequences. Do you want to open a gift business?

However, the online transactions' calculation will eat up a lot of your time at the end of the month to identify profit and loss margins. Therefore, we suggest you obtain a solution like Khatabook that keeps all calculations easily accessible anytime.
Do you have issues with payment management and GST? Install the Khatabook App, a friend-in-need and one-stop solution for all issues related to income-tax or GST filing, employee management and more. Try it today!

FAQs

Q: How to show gifts in an income tax return?

Ans:

Here's the easy method:

Type of Gift: Any sum of money without any considerations

Monetary Threshold: The entire money threshold sum is over ₹50,000

Quantum Taxable: The whole sum of cash received.

Q: Where can you show a gift from your father in the income tax return?

Ans:

You can show it in gift-exempt income. No matter which gift you choose, they are not considered under section 10. Therefore, in ITR, under the income exemption, choose 'any other' and describe the gift from the father in the bio box.

Q: What is the gift tax rate in India?

Ans:

The exact gift tax is calculated according to one's income tax rate. Therefore, individuals with the highest income tax bracket will be paying 30% tax as a thumb rule.

Q: What is a gift tax exemption?

Ans:

The gift tax is applicable for those gifts that cross the threshold of ₹50,000. However, the gift won't be taxed if you receive it from any relative.

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