Receiving pricey diwali gifts from your non-relatives will attract taxes

This Diwali you may both receive and give out gifts. When the value of the gifts is considerable, the government sometimes regards them as income for the recipient. This makes it imperative that we understand the rules relating to taxation of gifts.

Section 2 (24) of the Income-Tax (I-T) Act deals with gifts received that will be treated as a person’s income, while Section 56 (2) deals with both the taxation and exemptions on them.

Cash: A gift of up to Rs 50,000 can be received even from a non-relative without it attracting any tax liability. Says Aditya Chopra, managing partner, Victoriam Legalis-Advocates & Solicitors: “But if the amount exceeds Rs 50,000, the entire amount becomes taxable in the recipient’s hands.”

Gifts worth any amount can be received from relatives (see box) without attracting any tax liability. Exercise caution nevertheless. Says Gopal Bohra, partner, NA Shah and Associates: “Maintain proper information on the person from whom you received the gifts so that both the person’s identity and the gift’s genuineness can be established if asked for by the tax department.” 

Movable property: The rules for movable property, like electronic gadgets, jewellery, shares, are different. Says Suresh Surana, founder, RSM India: “Where the movable property is gifted without consideration, its entire fair market value (FMV) will be charged as tax in the recipient’s hands, provided it exceeds Rs 50,000.” FMV is the price an asset will sell for in the open market.

When an immovable property is gifted for inadequate consideration, and the difference between the FMV and actual consideration exceeds Rs 50,000, the differential amount is taxed under the head ‘income from other sources’. Suppose P receives a piece of jewellery worth Rs 1 lakh from a friend for a reduced price of Rs 40,000. Here, the difference between FMV and consideration is Rs 60,000. “As the difference exceeds Rs 50,000, the entire difference, Rs 60,000 in this case, will have to be offered to tax,” says Bohra. 

Immovable property: If a person receives an immovable property without consideration, and its stamp duty value exceeds Rs 50,000, the entire stamp duty value will be taxable in the recipient’s hands. In the case of inadequate consideration, the tax liability is calculated differently. Says Surana: “If the property’s stamp duty value exceeds the consideration by 10 per cent and that difference is also more than Rs 50,000, then the entire differential amount will be taxable under the head ‘income from other sources’.”

Those who receive several gifts—cash, movable, immovable property—from non-relatives need to aggregate their value. If they have been received without consideration or for inadequate consideration, and their aggregate value exceeds Rs 50,000 in a year, the gift amount should be included in one’s return and tax should paid on this. In the case of individuals, a personal balance sheet helps where the gift amount, if not taxable, gets added to the capital directly. Says Vivek Jalan, partner, Tax Connect Advisory Services: “The values must be reported correctly in ‘Schedule-OS-Income from other sources’ in the ITR, wherever applicable.”

How does the taxman define relative?
 

Gifts received from these relatives won’t be taxed

In case of an individual:

• Spouse, brother, or sister of the individual
• Brother or sister of the individual’s spouse
• Brother or sister of either parent of the individual
• Any lineal ascendant or descendant of the individual
• Lineal ascendant or descendant of the individual’s spouse
• Spouse of the persons referred to in items (B) to (F)
• In case of a HUF, any member thereof

Source: RSM India