Gift is “something given voluntarily without payment in return, as to show favour towards someone”. The practice of giving and receiving gifts possibly started with Adam and Eve. Gifts are usually given out of natural love and affection, to close family members, and friends, on special occasions, such as marriages, birthdays and anniversaries, for a larger circle. Earlier, the Gift Tax regime taxed gifts in the hands of the donor. The rationale behind charging Gift Tax was to deter tax evasion. However, the Act was abolished in 1998, since it apparently failed to serve its purpose!
The law makers felt a need to prevent money laundering activities, camouflaged as gifts. Accordingly, the law was amended in 2004, to bring certain gifts under the purview of Income tax. The tax incidence was shifted from donor to receiver.
Today, cash gifts of more than Rs. 50,000 per annum are taxable in the hands of a recipient. However, tax is not payable in case of gifts received from specified relatives, on the occasion of marriage, under will or inheritance, in contemplation of death of the payer, from local authority, approved funds / educational institutions / hospitals, registered charitable and religious trusts; without a limit on the amount of such gifts. This means that gifts of above nature could be of any amount, and would not suffer tax. Also, gifts on the occasion of marriage, received from any person (and not only from a relative) would not be subjected to tax.
Assessable gifts other than the above can be set off, against Losses of the year, if any, from house property or business. Relatives cover almost all persons, from the individual’s as well as the spouse’s side. There exists a planning opportunity here. Take a case of a family which has only one earning member. When total income of the family is only of one member, the tax liability is bound to be higher, taking into account the slab rates. In such cases, by using the ‘gift’ mechanism, the tax affairs could be intelligently planned so as to make the other family members independent taxpayers.
However, while doing this, the clubbing provisions need to be kept in mind. Where assets are gifted by an individual to spouse, daughter in law or minor children, income arising from such gifted assets is clubbed in the hands of such individual.
However, further income from such income would not be so clubbed.
Non-cash gifts are not subjected to tax. Thus, a window for planning exists here. No capital gains tax liability arises on gifting of assets. Subsequent sale of gifted assets by the receiver would be liable to capital gains tax. Cost of acquisition would be the cost to the previous owner who gifted the asset.
Any gifts, either in cash or kind, given by an employer to its employees are liable to Fringe Benefit Tax in the hands of the employer. If an individual is unable to offer explanation on the source of gifts, the same may get taxed in the hands of the individual, even if below Rs. 50,000. Hence, it is important to keep adequate details, to be able to substantiate the identity and genuineness of any gift received.
Lastly, while the taxman has tried to bring to tax ‘unreasonable’ gifts, which are misused for evasion of tax; it does not interfere with the natural scheme of gifting by humans.