Your money: A Will is better than gifting when passing on assets

Gift deed's language is closely scrutinised by the I-T dept, leading to problems for the receiver

Last Updated : Mar 19 2017 | 12:40 AM IST

If a critically ill person wants to pass on his assets to someone, a will is a better option than gifting. The receiver can face problems if the gift deed’s or affidavit’s language does not comply with the provisions of the Income-Tax (I-T) Act.

Taxation of gifts

According to the provisions of Section 56(2)(vii) of the Income-Tax Act, any gift above Rs 50,000 is taxable as income from other sources in the hands of the individual receiver. However, receipt of gift on certain occasions is not considered as income from other sources: If received from close relatives, on the occasion of an individual’s marriage, under a Will, or in contemplation of death.

The term ‘gift in contemplation of the death of the payer’ is defined under the Indian Succession Act, 1925. A gift is said to be made in contemplation of death when an ill person, who expects to die shortly of his illness, delivers to another the possession of any movable property as a gift. Such a gift is deemed to be made if the receiver has the right to keep the gift in case the donor dies of illness. The donor has the right to resume his ownership of the gift if he recovers from the illness.

Problems receiver can face

Recently, a case came up in the Income Tax Appellate Tribunal (ITAT), Chennai. An individual, who was expecting to die soon due to illness, made a series of gifts by issuing seven cheques in favour of his cousin (maternal uncle’s son). The donor declared in an affidavit: “I do not have any legal heirs as on date and further the donee is taking care of all the hospital expenditures on the treatment of my kidney. So, I hereby gift Rs 1.54 crore in consideration of such acts of the donee and out of natural love and affection.”

But, the I-T department taxed the gift in the hands of the receiver as income from other sources. The principal objection of the assessing officer was that the money was gifted much prior to the donor’s death and such money had also been utilised by the assessee in his business.

The tribunal observed that the gift had been made systematically in a series of seven cheques eight months prior to the date of the affidavit. Such a systematic transfer of gift is not expected from a person who is critically ill. Such a person does not know how long he will survive. So, even if such a person is planning to transfer a gift to his near or dear ones, he may do so but in one or two transactions.

Moreover, if a gift is made in contemplation of the death of the donor, the latter has the rights to resume his ownership of the gift if he recovers from his illness. In this case, however, the receiver used the gifted amount in his business. Hence, it was clear that the gift was never meant to be returned. The ITAT added it was also clear from the language of the deed that the gift was not conditional on the donor’s death, and would take effect immediately.

The ITAT further said the receiver was incurring expenditure for the donor’s medical treatment, which was in the nature of a reimbursement. The portion of reimbursement in the gift, therefore, could not be taxable under Section 56(2)(vii). The amount of reimbursement would be deducted from the amount of gift of Rs 1.54 crore and the balance, if any, could be a gift for the love, care and affection bestowed by the donor on his cousin. The balance amount, in this case, would not be treated as gift in contemplation of death as the language of the affidavit does not comply with the provisions of the Income-Tax Act. It would, therefore, be taxable under Section 56(2)(vii).

The ITAT observed that in order to be treated as ‘gift in contemplation of death’, the definition given under the Indian Succession Act, 1925 had to be satisfied. A gift is said to be made in contemplation of death when the transfer of gift is conditional on the death of a donor. Further, the gift should be retained by the donor if he recovers from his illness. However, in this case, this was not applicable.

Procedure to follow

If an individual is planning to make a gift in contemplation of his death, he needs to satisfy a few conditions. One, it should be proved that the gift is being made in contemplation of death of the donor. Any transfer of monetary gifts in a series of transactions over a period of time casts a shadow of doubt over its authenticity. So, monetary gifts should be made in one or two instalments to prove their sanctity. Two, a person can gift only movable property in contemplation of death, not immovable property. Things like watches, bonds, bank notes, promissory notes, bills of exchange, etc., can be gifted. Three, there should be a transfer of gift from the donor to the receiver. Thus, in case of a monetary gift, it would be better to transfer the money into the donee's bank account. Four, the gift should take effect only on the donor's death. This condition should be mentioned in the gift deed or affidavit. The gift should revert to the donor if he recovers from his illness. This too should be specifically mentioned in the gift deed or affidavit.

Thus, a person drafting a gift deed in contemplation of death needs to be vigilant. Tax authorities scrutinise the language of the deed or affidavit very closely. If an individual wants to make a gift to someone in contemplation of his death, it is advisable to draft a will for this purpose. A will made by a Hindu, Buddhist, Sikh or Jain is governed by the provisions of the Indian Succession Act, 1925.

Gifting in anticipation of death