Ideally, one thinks that gifts hold sentimental value and have nothing to do with personal income tax payments. However, many people give gifts with an intent to save income taxes, which is why you should be aware of those that are not exempt under the Income Tax Act.
More importantly, there are some gifts that are not tax exempt in the hands of the receiver. The non-disclosure of these could lead to a penalty of 50 to 200 percent of the actual income tax that you were liable to pay.
Gifts from specified relatives or on special occasions
Provisions under the section 56 of the Income Tax Act deals with gifts from anyone other than your employer. The forms of gifts are divided as:
- Money: Cash or cheque exceeding Rs 50,000 in aggregate value are not exempt from tax. Additionally, the whole value is taxable and not just the amount that exceeds Rs 50,000.
- Immovable property: Land or building received, whose benefit is Rs 50,000 or more. If it was received without consideration but the stamp duty value of the property exceeds Rs 50,000, the stamp duty is taxable. If payment was made towards the property and if the amount of acquisition exceeds stamp duty by a value greater than Rs 50,000, the difference between the two amounts is taxable.
- Movable property: Shares, securities, archaeological collections, jewellery, bullion, artwork, etc that was received as a gift or was purchased at a price lesser than the fair market value is taxed for the difference in benefit received in the hands of the recipient. Note that motor vehicles are not included in the list, so it is not taxable when received as a gift.
If not exempt, these gifts are taxed under "Income from other sources." The above categories of gifts are exempt from tax if received from certain relatives or on special occasions.
Those that are considered relatives for income tax implications on gifts:
- Child (including stepchild or adopted child)
- Daughter in law/Son in law
- Parents in law
- Step-father or mother
- Siblings (including half-brother or sisters)
- Brother in law and his wife
- Sister in law and her husband
- Grandchildren and their spouses
- Great grandchildren and their spouses
- Parent's siblings and their spouses
Not relatives for exemption on income tax purposes:
- Step-brother or sister
- Nephew or niece
Special occasions where the gifts are exempt from tax are:
- Gifts received from specified relatives mentioned above.
- Gifts received on the marriage of the taxpayer.
- Gifts gained from a Will or by inheritance.
- Gifts in contemplation of death of the donor.
- Gifts from a registered trust or institution.
- Assets distributed at the time of total or partial partition of HUF.
Gifts from Employer
An employee can receive gifts from his/her employer for good performance or other reasons. These are taxable if the aggregate of the value of gifts received during the financial year exceeds Rs 5,000. There are to be disclosed under "prequisites" section of the head "Income from salary". Gifts below Rs 5,000 are tax exempt.
Disclosing gifts received during ITR filing
- For gifts that fall under the taxable category, you shall disclose them under Schedule Salary or Schedule OS (Other sources) based on whether it is from employer or others.
- The gifts that are exempt from taxes can be disclosed in Schedule EI (exempt income).