An important aspect of taxation of gifts is that the recipient is taxed and not the person giving the gift
It is human nature to be happy when one gets a gift. One can make a list that would run into several pages containing excuses for giving gifts. However, the Income-tax (I-T) Department views gifts as a method of evading taxes. And, therefore, we have a host of clauses under the Income Tax Act which affect gifts.
The most important aspect of taxation of gifts is that the person giving the gift does not have to pay any tax. If any tax has to be paid, it is the donee or the person receiving the gift who has to do so. Thus, there is no such thing as gift tax, which was abolished with effect from 1 October 1998. What we have today is treatment of gifts as part of income and, that too, in certain circumstances.
Why is a gift taxed in the hands of the recipient? Over the years, many people have misused the abolition of the gift tax and converted their illegitimately earned income into official wealth by routing it as gifts. Many people engaged in nefarious methods of converting their black money into white money.
With a view to curb this menace the government amended the Income-tax Act effective financial year (FY) 2004-05. This amendment has been further modified recently by the Budget of 2009.
Many times, a father would make a gift of a large amount of money to his wife or to his minor children and invest that amount in the name of the wife or child. This was also done to shift income from the hands of the tax-paying father to the wife or child who paid little or no tax.
Such misuse of gifts was sought to be curbed long back by bringing in clubbing provisions under which a spouse's income arising from investments made using gifted amounts is clubbed with the income of the taxpayer who makes the gift. Similarly, a minor's income is clubbed with that of the parent whose income is higher in the first year in which the minor earns income.
Here's a look at the latest tax provisions relevant for gifts of various kinds.
Gifts from relatives. If a person receives a gift from a relative then, irrespective of the value of the gift, it is tax-free in the hands of the recipient. However, the term 'relative' is defined in the Income-tax Act. It means parents, children, grandparents, grandchildren, great grandparents, great grandchildren, brother or sister, spouse, brother or sister of spouse, brother or sister of parents, lineal ascendant or descendant of the spouse and, finally, spouse of any of the earlier categories.
Considering that such gifts are totally tax free, the I-T Department would obviously try to verify the genuineness of the gifts. Generally, when such gifts are disclosed, I-T officers try to verify the identity and the capacity of the donor and the genuineness of the gift. They may ask for confirmations from the donor and also for a copy of his bank passbook or statement.
Gifts from non-relatives. Gifts received under a Will or by way of an inheritance, or on occasion of one's marriage or from a registered charitable or education organisation or in contemplation of death of the donor are all exempt from tax in the hands of the recipient irrespective of the amount involved.
However, if one gets any other cash gifts from non-relatives exceeding Rs 50,000 in a year, the entire amount would be taken as income of the recipient.
Gift of movable and immovable property. Earlier, only cash gifts were taxed, but now, with the latest amendments in the I-T laws in 2009, even non-cash gifts will be taxed in the hands of the recipient with effect from 1 October 2009.
