Gift Tax in India

What is Gift Tax in India?

Gift tax in India refers to the tax levied on certain gifts, like money or property, given without expecting anything in return. Even though India abolished a distinct gift tax in 1998, gifts are being taxed under the Income Tax Act, 1961, as part of the recipient's income in specific cases. Think of it as a provision to avoid people getting around taxes by "gifting" large sums or holdings.

How Does Gift Tax in India Work?

If you've been gifted something, it rarely gets taxed except if it crosses a limit or is from one in a set identified group. Gifts (property, assets, or immovable property such as jewelry) valued over ₹50,000 per year are considered "income from other sources" for the beneficiary under Section 56(2) of the Income Tax Act, unless they're from tax-free sources such as immediate relatives or special events.

Who is exempted from Gift Tax?

Gifts are exempted if they're:

• From immediate relatives, i.e., parents, siblings, spouse, or direct descendants.
• Received during marriage (wedding gifts from anyone are exempt).
• Made through a will or inheritance.
• From a registered trust or charitable institution.
• Less than ₹50,000 in aggregate value annually (for non-exempt gifts).

For example, if your cousin provides you with ₹40,000, it's tax-free. But if a friend provides you with ₹60,000, the entire amount is taxable as it crosses ₹50,000.

Kinds of Taxable Gifts

• Cash or Cheques: Cash gifts over ₹50,000 from non-relatives are fully taxable.
• Immovable Property: If you're given land or a house without consideration or for much less than its market price (more than ₹50,000), the difference is taxable.
• Movable Property: Donations like jewelry, stocks, or cars contributed under the fair market value can trigger tax on the differential.

Tax Rates and Reporting

Taxable gifts are included in your income and taxed at your income tax slab rate (say, 5% to 30%, based on your income). You have to report these in your Income Tax Return (ITR) under "income from other sources." For properties, the taxable value is usually the stamp duty value (for immovable) or fair market value (for movable assets).

Why Does Gift Tax Exist?

The government utilizes gift tax in order to prevent tax evasion, i.e., remitting money or assets in order to escape income or wealth tax. It is reasonable but permits genuine gifts, especially between relatives or during marriage.

Example of Gift Tax

Suppose your boss gives you ₹1 lakh in cash on your birthday. Since they are not a near relative, the whole amount is taxable. If you're in the 20% tax slab, you'll have to pay ₹20,000 as tax. But if your mother gives you the same amount, it's totally tax-free.

Things to Keep in Mind

• Documentation: Keep receipts of gifts, especially those that are of high value, to support where they came from in case the tax department asks.
• Non-Residents: Gifts between or to non-residents may have special regulations, for example, foreign exchange controls.
• Seek Experts: In the case of big gifts, like property, seek a tax expert so as not to be caught unaware.