Are gifts taxable?

Rajasthan

I sympathise with your plight. Moreover,you are not alone in being confused on the subject. Let us understand the whole subject of taxation of gifts.

First,we had the Gift Tax Act of 1958 which imposed gift tax on the donor for making gifts of money or money8217;s worth to another person. The rate of tax was based on a slab system: higher the amount of gift,higher the gift tax. This was a donor-based tax. It was intended to deter people from passing income to close relatives by gifting income-producing assets and thereby saving on payment of income tax. Moreover,income tax on Rs 10 lakh paid by one entity is always higher than the aggregate tax paid on Rs 5 lakh each by two entities. This is due to the benefit of the initial basic exemption as well as the lower rates of tax on initial slabs. Gifting away assets and funds also saved a person from paying a substantially steep estate duty payable on death basic exemption only Rs 50,000.

When estate duty was abolished with effect from March 15,1985,gift tax lost much of its rationale. Yet it continued till September 30,1998. From October 1,1998,there was no gift tax on any gift of money or money8217;s worth on any one neither the donor nor the donee.

Come 2004 and P. Chidambaram as Finance Minister revived the gift tax. But this time the tax was levied on the recipient of the gift by treating the gifted amount as his income. Effectively,from September 1,2004,the recipient has to include the gifted amount of money as his total income and pay income tax on his total income as increased by the sum of money received as gift. There was a basic exemption of Rs 25,000 per year that was raised to Rs 50,000. However,gifts from close relatives received by an individual were fully exempt from this provision without any limit,and hence did not attract any tax in the hands of the recipient.

A close reading of the change in 2004 would have revealed that only gifts of 8220;a sum of money8221; were taxed. 8220;Gifts in kind8221; remained outside the purview of taxation.

With effect from October 1,2009,now all gifts,whether of a sum of money or in kind,are treated as income in the recipient8217;s hands and income tax is levied on them.

However,even after October 1,2009,a gift of sum of money as well as in kind of any amount or value among close relatives continues to be exempted from taxation in the hands of the donee. The question of any tax on the donor does not arise since donor-based gift tax was abolished on October 1,1998.

Similarly,even now after October 1,2009 the basic exemption of Rs 50,000 per year in respect of all gifts in money or money8217;s worth also continues. This basic exemption of Rs 50,000 is to be computed by totalling all the gifts received by an individual from all persons non relatives in a financial year from April 1 to March 31 each year. Thus,say,Mr. A receives a gift by cheque of Rs 35,000 from Mr. B a non-relative on October 7,2009,and yet another gift of shares worth Rs 30,000 from Mr. C non-relative on November 5,2009. He will have to include Rs 15,000 35,000 30,000 8211; 50,000 in his income of,say,Rs 5,00,000 and pay income tax on Rs 5,15,000.

Gifts of all kinds received on the occasion of marriage or under a Will even from non-relatives are exempt without any upper limit.

Finally,a relative is defined to mean:

a. Spouse of the individual;

b. Brother or sister of the individual;

c. Brother or sister of the spouse of the individual;

d. Brother or sister of either of the parents of the individual;

e. Any lineal ascendant or descendant of the individual;

f. Any lineal ascendant or descendant of the spouse of the individual;

g. Spouse of the person referred to in the clauses ii to vi;

Hope I have managed to clarify your doubts on this rather complicated subject.

The author is a Mumbai-based chartered accountant