What Is Gift Tax in India? - Meaning, History & More Explained

Gifting, in some form or another, is and has always been prevalent throughout the ages. Be it archaic Greece, ancient Egypt or our own Vedic age, gifts have always had a ritualistic importance. This, naturally, makes it quite a universal concept, and thus, it’s why we love to give and receive gifts, even if we have to pay a tax for it, as the case may be in some instances.

What is gift tax?

In terms of its literal meaning, gift tax is simply a tax on gifts. In terms of its literal meaning, gift tax is simply a tax on gifts. But the words often lead to people wondering over which category of gifts is taxable. Will our wedding gifts be taxed? Or those we receive on our anniversaries, birthdays or other occasions? Will inheritance be counted as a taxable gift? What about gifts from a family member, apropos of nothing? Or a gift received from the community in recognition of our activity?

Provisions of the Income Tax Act relating to gifts clear away the confusion; no, your wedding gifts will not be taxed, nor will your inheritance unless you sell it. Your other gifts, too, will be spared. The details have been explored in the section ‘Gift in Income Tax Act’ below.

History of gift tax in India

Gift tax was introduced with the Gift Tax Act of 1958. The Act imposed a tax on giving gifts in a bid to discourage people from evading taxes through the method of gifting. The Gift Tax Act levied taxes on a "donor-based" mechanism. Accordingly, any gifts valued above the exemption limit of ₹30,000, were taxed in the hands of the donor at the rate of 30%. However, this Act was abolished in October 1998, which made all gifts free of tax.

During the gift tax regime and since its abolition, people could continue to receive gifts of petty amounts from different people, without either party having to pay taxes. This was noticed as the cause cited by the accused in disproportionate asset cases.

Provisions of gift tax were reintroduced in 2004 and inserted under Section 56 of the Income Tax Act, 1961, which came into effect on 1 April 2005 under the Finance Act of 2004. In a major deviation this time, Gift Tax became a ‘donee-based’ taxation system. Under the new rules, gifts received above ₹50,000 are taxed in the hands of the recipient, not the donor. The gift so calculated is included under the head “Income from other sources.” This also settles the question, of whether gift tax is a direct or indirect tax. Due to its attachment to the Income Tax Act, gift tax is a direct tax.

Also Read: How To Save On Gift Tax in India ?

Gift in Income Tax Act

As per the Income Tax Act, a gift is classified as the following -

• Sums of money received without consideration are considered monetary gifts
• Specified movable property received without any consideration
• Specified movable property received at a reduced price, less than fair market value or for inadequate consideration
• Immovable property received without any consideration
• Immovable property that was acquired at a reduced price, less than its stamp duty value or for inadequate consideration

Even money received without consideration is treated as gift and taxed, if the total receipt during the year exceeds ₹50,000. Money can be cash, cheque, draft, etc.

With effect from 5 July 2019, any money paid without consideration by a resident Indian to a non-resident person or foreign company is considered to accrue or arise in the country and is accordingly taxed.

Important Point - Who is eligible for Gift Tax - It is applicable to individuals and Hindu Undivided Families (HUF).

How much is gift tax in India?

The Income Tax Act specifies the rule for the applicability of tax on gifts in India received by an individual or a HUF.

1. If a total of more than ₹50,000 is received during a year, without any consideration, the entire amount received is taxable.
2. If an immovable property is received without any consideration and the property’s stamp duty is more than ₹50,000, the entire stamp duty value is taxable.
3. Such property is acquired for consideration, but the consideration is less than the stamp duty value and the difference exceeded is higher than ₹50,000 and 10% of the consideration.
4. Any property, other than an immovable property is received without any consideration, the aggregate fair market value of the property will be taxable if it exceeds ₹50,000.
5. Any property, other than an immovable property is received and its consideration is less than its aggregate fair market value by more than ₹50,000. The difference between the consideration and the fair market value is taxed.

Stamp duty value is important in calculating the tax liability on gifting of immovable property. However, the valuation of stamp duty can be affected by a gap between the date of registration and the date of fixing the consideration. In the case of such differences, the date of fixing the consideration is used, provided it is partly or fully paid through a bank draft, account payee cheque or online transfer on or before the date of agreement of transfer.

What is gift tax, with an example

Let us assume that you purchase a house for ₹25 lakh and its stamp duty value is ₹30 lakh. That is a difference of ₹5 lakh, ₹4.5 lakh more than the threshold as well as 10% of the consideration value. In this transaction the total difference of ₹5 lakh is taxable.

However, if the stamp duty value is ₹27 lakh, the difference of ₹2 lakh, is not higher than 10% of the consideration. In this case, the ₹2 lakh is not taxable.

Also Read: What Are The Taxes Levied On Gifts For Individuals?

Exceptions to the gift tax applicability

It is commonly known that gift tax is not charged if exchanged between close relatives. Here are all the situations where a monetary gift that is received by an individual or HUF will not be charged tax:

1. Money received from relatives, where relatives are -
In the case of an individual:


1. Spouse
2. Sibling(s)
3. Brother/sister of the spouse
4. Brother/sister of either parent
5. Any lineal ascendant/descendent
6. Any lineal ascendant/ descendent of the spouse
7. Spouse of the persons referred to in points (b) to (f)

In the case of a HUF: -


2. Money received on the wedding of the individual
3. Money received under a will or by way of inheritance
4. Money that is received in the contemplation of the death of the payer/donor
5. Money got from a local authority, as per explanation to section 10(20) of the Income Tax Act
6. Money got from a fund, foundation, university/other educational institutions, hospital/medical institutions, a trust or institution mentioned in section 10(23C)*
7. Money received from/by a trust or institution that is registered under section 12A, 12AA or section 12AB*
8. Money received by any fund/trust/institution, a university/other educational institution, or any hospital/medical institution that’s referred to in section 10(23C) (iv)/(v)/(vi)/(via) (Applicable if the property is received on or after 1st April, 2017).
9. Money received because of a demerger/amalgamation of a company/business reorganisation of a co-operative bank which falls under section 47.

*With effect from AY 2023-24, this exemption is not available should a sum of money received by a specified person that is referred to in section 13(3).


Also Read: Gift Tax: Rules And Exemptions Of Gift Tax

Examples of gift and non-gift

Receipts	Gift	Not a gift
Money received without/with inadequate consideration	Above ₹50,000	Below ₹50,000
Specified movable property without/with inadequate consideration	Above ₹50,000	Below ₹50,000
Any immovable property without/with inadequate consideration	Stamp duty value above ₹50,000	Stamp duty value below ₹50,000
Money received	Receipts from non-relatives	Receipts from relatives
Money or property received	Other than local authorities, and religious or charitable organisation	Received from local authorities, and religious or charitable organisation

How can gift tax be avoided?

Gifting to children, grandchildren, or parents on special occasions like festivals, anniversaries and birthdays is a common practice. If you gift them property valued above the specified limits, the provisions of gift tax may be attracted. There may be scenarios where gifting money does not lower your tax exposure.

However, instead of gifting and attracting gift tax liability, you can invest on behalf of the recipient and reduce your tax exposure in the process.

Investing money in the name of your family members as your spouse, children or parents is also quite common in India.

You can end up earning tax deductions and reducing tax liability by opting for different types of “gifts,” instead of gifting movable or immovable properties.

Investment in tax-friendly policies and schemes

Most of these investments fall under Section 80C’s list of recognised investments. An investment in Equity-Linked Saving Scheme, Public Provident Fund, Unit-Linked Insurance Plan, Senior Citizen Saving Scheme, etc., can be claimed as a deduction from the total income. There is the simple tax-saver fixed deposit where you can invest for your loved ones and save taxes.

Investment for senior citizen parents and parents-in-law

Investments in the name of your senior citizen parents will generate additional interest on the deposit. The investment can be an FD, a senior citizen saving scheme or something else. Besides, most parents are past their active life and may not be earning. So, the income earned by them on the investment made may not put them in a higher tax bracket.

Investment for non-earning children

If you have children above 18 years of age, you should make an investment in their name. Gifting money to a spouse or minor child doesn’t reduce your taxable income. Besides, interest earned on such money is also clubbed to your income. However, in the case of parents, parents-in-law and major children, the income generated from the gift money is taxable in the hands of the recipient. Like your retired parents, if your child is a young adult and not yet earning you can invest in his or her name. Income on such an investment will form part of the child’s tax liability. However, that shouldn’t be a concern if the child stays within the tax slabs.

Also Read: Gifting Money to Your Family While Availing Tax Benefits: 3 Tips

Conclusion

A clearer understanding of gift taxation will help you make your income declarations better. It is important that you familiarise yourself with the taxability of gifts so that you avoid the tax department’s attention regarding undeclared income.

FAQs – Frequently Asked Questions