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Gifts are exchanged between friends and families to carry deep meaning and goodwill. A significant part of our Indian culture of showing love and joy is to give a gift on every occasion, whether it is a wedding, a festival, or a birthday. In India, gifts bring twists. If the value of your gift exceeds a certain amount, you will fall under specific tax implications, but don’t worry, there are also exemptions available that can help you.
In the Income Tax Act, 1961, certain gifts are considered taxable. If you fail to understand these parameters and limits set by the act, you will unnecessarily fall into the unwanted trouble of the tax authorities. Whether you are a giver or a recipient, understanding the core concept of gift taxation in India is essential to stay compliant with the applicable rules and regulations.
So, before giving or receiving any gifts from your friends and family, let’s understand what such gifts represent under the Income Tax Act and how and when they become taxable in India.
As per the Income Tax Act, 1961- A Gift is defined as follows:
Section 56 of the Income Tax Act, 1961, says that a gift received is taxed in the hands of the recipient under the income head ‘Income from other sources’. So, the next time when you receive a gift from someone which exceeds the threshold limit, you must pay tax on that gift. The tax rate applicable here will be the normal tax rates that apply to other sources of income as well.
Be patient and relax, not all your gifts are taxable but there are some kind of gifts (that reach the threshold limit defined in the act) which are taxable in India –
Let’s look at the threshold decided by the law based on the kind of gifts for taxable purposes:
| Kind of Gift | Threshold | Taxable Amount |
| Monetary gift received | The limit is 50000. If the sum of money received exceeds 50000 then it is taxable. | The taxable amount will be the entire sum of money received. |
| Gift of movable property | If the Fair Market Value (FMV) of the movable property exceeds 50000, then it is taxable. | The value that is taxable in this case is the entire value of movable property. |
| Movable property received for inadequate consideration (the value received is less than its FMV). | If the FMV is more than the consideration and this difference must exceed 50000. | The difference between FMV and consideration will be treated as Income and hence taxed. |
| Gift of immovable property | If the stamp duty value is more than 50000. | The whole amount of stamp duty value will be taxable. |
| Immovable property for inadequate consideration (received less than its stamp duty value). | If the stamp duty value exceeds the given consideration by 50000. | The amount taxable in this case will be=
stamp duty value – value of consideration. |
Tax Rate: The tax rates on gifts depend on your income tax slab (5-30%). While calculating income tax on gifts received, the taxable value is reported as under “Income from other sources”.
No matter whether it is cash, a car, or jewelry, if you have received or are giving someone a gift worth more than this threshold value, it is taxable for sure, and it means that you need to declare it.
Note: The Gift Tax Act, 1958, was abolished in India on 1st October 1998, and now ‘Gift Taxation’ falls under the purview of the Income Tax Act, 1961, under section 56(2)(x).
This section outlines the taxation of Gifts received by an individual or a Hindu Undivided Family (HUF).
Above, we learn that you must pay tax on gifts if the amount you receive exceeds the threshold limit. We will now discuss the exemptions available for your gift.
There are certain cases under specified conditions in which you don’t have to pay any tax.
Let’s understand these cases in detail-
| Receiver | Giver | Occasions |
| Individual | Close relatives – brother or sister, spouse, brother or sister of spouse, lineal ascendants or descendants (parents, grandparents, children), spouse of any of these relatives. | No special occasion is specified in this case. |
| Individual | Given by any person. | If the occasion is the Marriage of the Individual. |
| Any person | Given by any person. | If the gift is received by way of inheritance or under a will. |
| Any person | Given by any person. | If the giver/payer has died. |
| Any person | If the giver is any municipal corporation, panchayat, or any other local authority. | Not any special occasion is specified in this case.
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| Any person | If the gift is given by any charitable trust, foundation, educational institution, or any other trust or institution referred to in section 10 (23C). | Not any special occasion is specified in this case.
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| If the gift is given by any charitable trust, foundation, educational institution, or any other trust or institution referred to in Section 10 (23C). | Any person | Not any special occasion is specified in this case.
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| Members of HUF | The gift is given by the HUF itself. | If the HUF is distributing its capital assets totally or partially to its members. |
| Trust | Individual | If the trust is created with the purpose of benefiting the individual or a relative. |
A good understanding of these exemptions will help you plan your gifts in a better way and avoid unnecessary tax expenses. These exemptions are introduced to provide a safer tool for genuine family transfers and occasions.
Clubbing of income means adding (clubbing) the income earned from a gifted asset to the income of the person who gave the gift, instead of the person who received it.
There’s a misconception that if you gift a particular amount to your spouse or minor child, that quantity is automatically exempt from taxation. It brings us to our next point. To understand how you’ll save on your tax through gifts, you’ve got to understand the ‘Clubbing’.
Assume that you have a yearly income of Rs.10 lakhs. You gift Rs. 1 lakh from it to your wife, and you can’t claim that your taxable income is Rs.9 lakhs. So you have to pay taxes per your tax slab on the entire Rs. 10 lakhs.`
Now, the Rs.1 lakh gift amount isn’t considered as your wife’s taxable income. However, if your wife invests that cash in, say, a Fixed Deposit (FD) within the bank, then the interest received from that FD are going to be considered taxable income, not of your wife, but you. This phenomenon is named ‘Clubbing’ and is the same if the quantity is presented to your child, who may be a minor.
The only way to save tax through gifts is by gifting to your parents or parents in law or a significant child. When you gift the amount, your taxable earning remains the equivalent, though. But, the interest they earn from other products by funding this money becomes their income. So, assuming their earnings are lower, you can rest in peace knowing that the money will not be taxed.
Before long term capital gains (LTCG) tax was active, the individual could also fund gift money in mutual funds or stocks for 1 year and lay hold of it out as tax-free earning. However, now it is impossible as LTCG tax has been reinstated with effect from 1st April 2018.
The Indian legislative system required a levy tax on gifts in the donor’s hands by enacting the Gift Tax Act, 1958. This legislation was abolished in 1998. However, 6 years later, the Finance Act 2004 introduced section 56(2)(v) for taxing gifts in the recipient’s hands. Accordingly, today gifts received by a person or Hindu Undivided Families (HUFs) are taxed as under.
The legislations are penned, so on levy tax albeit gifts are provided by an employer to employees. Such gifts are taxable within the workers’ hands as salary income provided the mixture value is Rs 5,000 or more during a year. Gifting has always been seen as how for people to precise love and affection. However, with the increased specialization in taxation, it becomes imperative to understand its taxability.
As per the law, a person (done/recipient) receiving a sum of cash, or immovable property or the other specified property from the other person (donor) for inadequate consideration, (i.e. but for the fair market price of the property or stamp tax value just in case of immovable property), is inclined to be taxed on the worth of such gift.
In the above context, the property comprises immovable property being land or building or both, shares and securities, jewelry, archaeological collections, drawings, paintings, sculptures, any work of art and bullion, etc.
Exemptions are fixed out indeed specified categories of persons/recipients from the purview of taxation from gifts. Companies under specifically defined schemes of reorganization too are exempted from the above incidence of tax.
No matter whether the gift is taxable or exempt, it is always advisable to report it in your ITR filing. If the gift is exempt from tax, you can show it in the ‘Exempt Income’ section. Doing so will build transparency in your filing, and if the income tax department raises any queries related to it in the future, this will serve as proof.
And if the gift is taxable, filing it in the ITR is essential according to the applicable laws. If you’re unsure about how to file this in your ITR, you can contact our professionals. They’ll assist you with hassle-free filing.
If you fail to report this legal requirement of gift tax in your ITR (Income Tax Return), you will face severe penalties from the income tax authorities of India. Meeting the threshold criteria, which have been clearly stated in the section, means you have to comply with the rules, or else, income tax authorities can reassess your income and levy interest and severe penalties on you. This can also lead to additional fines, in addition to penalties, in the event of a guilty verdict.
And thus, it is advisable to consistently document the gifts received and given by yourself and establish a sufficient source of funds to justify the gifts received, as well as to take care of this when providing a gift to someone.
Good knowledge and better understanding are required of the limits and exemptions applicable to gift tax to avoid any consequences and penalties arising and keep pace with compliance. Sharing wealth by way of gifts is a joyous thing, but at the same time, we need to remember the thresholds, exemption limits, penalties, and consequences if not followed.
If you have the proper knowledge, you can surely enjoy this without taking any worries about tax implications. All you need is to consult an experienced professional who will provide you with a clear guide for gifting things wrapped in the warmth of love.
At Mercurius, our expert team is always available to guide you through gift taxation and provide a clear understanding of al regulatory compliances whenever you are in doubt. We also help our clients navigate various tax regulations and ensure they remain compliant with all mandatory requirements.
We provide you with all the necessary documentation guidelines to help you take advantage of the exemptions and make your tasks easier. For more details, get in touch with us here.
