Taxation of gifts by an Individual/HUF

As per section 56(2)(vii) of Income Tax Act, gifts received by an individual or a hindu undivided family in the form of money or property (without consideration or with inadequate consideration) is taxable as income under the head Income from Other Sources provided such income falls under five categories mentioned below and such income does not fall in the exempted category. The provisions of this section are applicable where the recipient receives gift on or after October 1, 2009.

Which are the categories under which gifts received are taxable?

Category	Criterion for taxability	Taxable income	For ceiling limit of Rs.50,000 whether a single or all transactions of PY will be considered
1. Any sum of money (Gift in cash/cheque/ draft other than loan)	Aggregate amount received from one or more persons during the previous year (PY) exceeds Rs.50,000	Whole of such aggregate amount	All transactions
2. Immovable property without consideration	Stamp duty value of the property exceeds Rs.50,000	Stamp duty value	Single transaction
3. Immovable property for a consideration which is less than stamp duty value	Property is received for a consideration which is less than stamp duty value by an amount exceeding Rs.50,000	Difference between the stamp duty value and the consideration	Single transaction
4. Movable property without consideration	Aggregate fair market value (FMV) of properties received exceed Rs.50,000	Whole of such aggregate FMV	All transactions
5. Movable property for a consideration less than FMV	Property is received for a consideration which is less than aggregate FMV by an amount exceeding Rs.50,000	Difference between aggregate FMV and the consideration	All transactions

Each of the above categories are practically explained in the Illustration given at the end.

What is property?

Property means the following capital assets of the recipient:

1. Immovable property being land or building or both
2. Shares and securities
3. Jewellery
4. Archaeological collection
5. Drawings
6. Paintings
7. Sculptures
8. Any work of art
9. Bullion

Serial No.2 to 9 are movable properties.

What is stamp duty value?

It means the value adopted or assessed or assessable by any authority of the Central/State Government for the purpose of payment of stamp duty in respect of an immovable property.

What is exempted category?

While computing the aggregate limit of Rs.50,000 in any of the five categories above, the following shall not be considered:

1. Money/property received from a relative

2. Money/property received on the occasion of the marriage of the individual
3. Money/property received by way of will/inheritance
4. Money/property in contemplation of death of the payer
5. Money/property received from a local authority
6. Money/property received from any fund/foundation/university/other educational institution/hospital/ medical institution/any trust/institution referred u/s 10(23C)
7. Money/property received from charitable institute registered u/s 12AA

Who is relative?

The word relative includes the following:

Relative	In case the taxpayer is X
Spouse of the individual	Mrs. X
Brother or Sister of the individual	Brothers or Sisters of X
Brother or Sister of the spouse of the individual	Brothers or Sisters of Mrs. X
Brother or sister of either of the parents of the individual	Brothers or Sisters of father or mother of X
Any lineal ascendant or descendant of the individual	Lineal ascendant/descendant of X
Any lineal ascendant or descendant of the spouse of the individual	Lineal ascendant/descendant of Mrs. X
Spouse of the person referred to in (2) to (6)	Spouse of the aforesaid persons

Who are lineal ascendants or descendants?

Lineal Ascendant means individual’s father/mother, grandfather/grandmother, great-grandfather/great-grandmother and so on. Lineal Descendant means individual’s son/daughter, grandson/granddaughter, great- grandson/great-granddaughter and so on.

Is income taxable where the recipient and/or donor is a non-resident?

Yes, the provisions of section 56(2)(vii) shall be applicable irrespective of the fact whether the recipient and/or the donor is resident or non-resident.

Are gifts received from members or relatives of members of HUF taxable?

Gifts received from members of HUF are not taxable. But gifts received from relatives of members of HUF are taxable.

How are properties valued?

Rules of valuation of various properties are given below:

Property	Valuation
Immovable property	Stamp duty value of the property. Where date of agreement and registration are not same, the stamp duty value may be taken as on the date of agreement for transfer and not as on the date of registration for such transfer. This exemption is applicable where consideration in part/full, is received by any mode other than cash on/before the date of agreement.
Jewellery/archaeological collections/ drawings/ paintings/sculptures/any work of art	If purchased from a registered dealer (under sales tax), invoice value is the FMV. In any other case, value such property would fetch if sold in the open market on the valuation date (in this case, report of registered valuer to be obtained by the assessee).
Quoted shares & securities (received by way of a transaction carried out through a recognized stock exchange in India)	Transaction value as recorded in such stock exchange
Quoted shares & securities (not received by way of a transaction carried out through a recognized stock exchange in India)	The lowest price quoted on any recognized stock exchange in India on the valuation date. If no trading in any recognised stock exchange on such date, lowest price of such shares/securities on a date immediately preceding the valuation date (when traded) shall be the FMV.
Unquoted equity shares	There are two options:
Option 1	Value of one share = net worth x paid up value of one share / total amount of paid up equity as in balance sheet (explained below in detail)
Option 2 [Applicable only in case of sec 56(2)(viib)]	FMV shall be determined (at the option of the assessee) by a merchant banker or an accountant as per Discounted Free Cash Flow Method
Other unquoted shares & securities	FMV would be the price it would fetch if sold in the open market on the valuation date. Assessee to obtain a report from Category-I merchant banker (registered with SEBI) or a CA in respect of such valuation.

Further details on Valuation using option 1 (as mentioned above)

Value of one share = net worth x paid up value of one share / total amount of paid up equity as in balance sheet

Net worth = assets – liabilities

Assets =

Book value of assets

Less:

(1) Any amount of tax paid as deduction or collection at source or as advance tax payment less refund

(2) Unamortized expenditure which does not represent the value of any asset

Liabilities =

Book value of liabilities but not including:

1. Paid up capital (equity)

2. Amount set apart for payment of dividend (preference/equity) when such dividend is declared before the date of transfer at general meeting

3. Reserves & surplus (even if negative) other than depreciation reserve

4. Provision for taxation (other than TDS/TCS/advance tax less refund) to the extent of excess over the tax payable with reference to book profits

5. Provision for liabilities other than ascertained liabilities

6. Amount representing contingent liabilities (other than arrears of dividend payable in respect of cumulative preference shares)

Illustration:

X receives the following gifts during the PY 2014-15:

S/N	Date	Value (Rs.)	Nature of gift	Remarks
1	02/04/2014	2,90,000	Gift on occasion of marriage of X	Rs.2,00,000 is received from friends of X & Mrs. X and the remaining Rs.90,000 from close relatives of X & Mrs. X
2	22/06/2014	23,000	Gift from C, who is cousin of father
3	18/08/2014	15,000	Gift from D, who is brother of grandfather
4	20/09/2014	7,00,000	Gift from grandmother
5	20/10/2014	65,000	Gift from employer	It was purchased by employer on 01/05/2014
6	02/11/2014	65,000	Purchase of house property from friend D	Stamp duty value is Rs.10,00,000
7	30/11/2014	15,00,000	Gift of plot of land from grandfather	Value mentioned is the stamp duty value
8	30/12/2014	25,00,000	Gift of commercial flat	F is elder brother of X’s father-in-law & value mentioned is stamp duty value
9	06/01/2015	2,00,000	Gift from a notified public charitable institution	Cash gift of Rs.25,000 and gift of a work of art whose FMV is Rs.1,75,000
10	11/01/2015	15,40,000	Receives house property under will of a person known to him	Value mentioned is stamp duty value
11	20/01/2015	40,000	Gift of wrist watch from friend B	Value mentioned is the FMV
12	25/01/2015	16,00,000	Purchases a work of art from an exhibition in New York	FMV on the date of purchase is Rs.17,00,000
13	01/02/2015	8,00,000	Purchases a commercial property	Stamp duty value is Rs.8,50,000
14	05/02/2015	11,000	Gift of a gold chain on birthday from friend	Value given is FMV
15	10/02/2015	19,00,000	Gift of plot of land from a partnership firm	Firm partners are father of X and Mrs. X and value given is stamp duty value
16	16/02/2015	45,000	Purchase of 500 shares in Tata Chemicals from friend D at Rs.90 per share (outside stock exchange)	The lowest market quotation in BSE & NSE on the date of purchase is Rs.300 & Rs.310 respectively
17	01/03/2015	20,000	Gift of gold ring from a cousin of mother-in-law	Value given is FMV
18	20/03/2015	19,000	Gift of a painting from C Ltd	Mrs. X holds 70% shares in C Ltd and the value given is FMV
19	25/03/2015	44,000	Gift of plot of land from a cousin of Mrs. X	Value given is stamp duty value
20	31/03/2015	50,000	Gift of shop in Jammu from a friend	Value given is stamp duty value

Compute the amount chargeable to tax in the hands of X under the head income from other sources for the AY 2015-16.

Solution:

Particulars	Cash gift	Gift of immovable property	Gift of movable property	Purchase of movable property for inadequate consideration	Purchase of immovable property for inadequate consideration
1. Gift on occasion of marriage	Nil	-	-	-	-
2. Gift from C (not a relative)	23,000	-	-	-	-
3. Gift from D (not a relative)	15,000	-	-	-	-
4. Gift from grandmother	Nil	-	-	-	-
5. Gift from employer (taxable under salaries)	-	-	-	-	-
6. Purchase of house property for inadequate consideration (difference b/w stamp duty value and consideration as it exceeds Rs.50,000)	-	-	-	-	9,35,000
7. Gift of plot of land from grandfather	-	Nil	-	-	-
8. Gift of commercial flat (not a relative)	-	25,00,000	-	-	-
9. Gift from a notified public charitable institution	Nil	-	Nil	-	-
10. Receives house property under will of a person known to him	-	Nil	-	-	-
11. Gift of wrist watch (not a property)	-	-	-	-	-
12. Purchases a work of art from an exhibition in New York (difference b/w FMV and consideration as it exceeds Rs.50,000)	-	-	-	1,00,000	-
13. Purchases a commercial property (difference b/w stamp duty value and consideration does not exceed Rs.50,000)	-	-	-	-	Nil
14. Gift of a gold chain on birthday from friend	-	-	11,000	-	-
15. Gift of plot of land from a partnership firm (not a relative)	-	19,00,000	-	-	-
16. Purchase of 500 shares [(Rs.300 – Rs.90) x 500]	-	-	-	1,05,000	-
17. Gift of gold ring from a cousin of mother-in-law (not a relative)	-	-	20,000	-	-
18. Gift of a painting from C Ltd (not a relative)	-	-	19,000	-	-
19. Gift of plot of land from a cousin of Mrs. X (stamp duty value does not exceed Rs.50,000)	-	Nil	-	-	-
20. Gift of shop in Jammu from a friend (stamp duty value does not exceed Rs.50,000)	-	Nil	-	-	-
Total	38,000	44,00,000	50,000	2,05,000	9,35,000

Amount taxable u/s 56(2)(vii) under income from other sources is calculated as follows:

Particulars	Rs.
1. Cash gift (not taxable as aggregate amount does not exceed Rs.50,000)	-
2. Gift of immovable properties	44,00,000
3. Purchase of immovable property for inadequate consideration	9,35,000
4. Gift of movable properties (not taxable as aggregate amount does not exceed Rs.50,000)	-
5. Purchase of movable properties for inadequate consideration	2,05,000
Amount taxable u/s 56	55,40,000