The Indian taxation system is complex and riddled with a host of direct and indirect taxes. From paying taxes on the income of someone else, to paying taxes in addition to your regular Income Tax, the taxation system keeps changing with the times.
The Gift Tax is one such taxation system that has been in place since 1958. According to this Act, if the value of the gift exceeds Rs 50,000, the gift is taxed as income in the hands of the person receiving it.
The tax was introduced to generate revenues for the government on giving and receiving gifts under circumstances specified under the act. These gifts could be cash, jewellery, property, stocks and automobile, among others.
Understanding Gift Tax Gift Tax, first introduced in 1958, has seen it all, from being implemented in totality, to being abolished, and then brought back again partially in the tax structure. As things stand today, if you receive any gift exceeding Rs 50,000 from anyone except specified relatives, you are liable to pay a Gift Tax subject to the conditions and exceptions as per the Income Tax Act of 1961.
You, as the recipient of the gift, are liable for payment of the Gift Tax and not the person who is gifting you. There is, however, some respite from this tax. If you receive gift from a close relative, Gift Tax would not be applicable. As per the Income Tax Act, a relative is described as a close one if he or she is someone who is either a parent, spouse, sibling, spouse’s sibling, or lineal descendant of either self or spouse. Also, gifts received as part of inheritance or wedding are also kept outside the ambit of Gift Tax. Cash or rewards received by local authorities or educational institutions on the basis of merit is also exempted.
For example, your father wants you to purchase a property and has transferred Rs 10 lakh to you for the down payment. This amount is not taxable in your hands. However, any income you generate by renting out this house, or capital gains you generate by selling it the house, will be taxed as per the appropriate Income Tax or Capital Gains Tax rules.
The value of gifts received by a minor will be clubbed with the income of the minor’s earning parents. If both parents are earning taxable incomes, the value of the gift will be added to the parent with the higher income.
Gifts received by an NRI relative is exempted from Gift Tax. In the case of gifts being exchanged between spouses, there’s no need to pay Gift Tax, but any income generated by this gift will be clubbed with the receiver’s income and be taxed. This is true for all income and capital gains earned by the gift receiver.
For example, if you transferred Rs 2 lakh to your wife, she won’t have to pay taxes on this transaction. However, if she were to invest the money and earn interest or capital gains, she will have to pay taxes on them.
How much tax is charged as Gift Tax? There is no fixed percentage charged as Gift Tax. The total value of your gifts in the financial year including cash, cheque amount, stamp duty value of property as well as value of other assets will be calculated and added to your income. You will then have to pay your Income Tax as per the tax slab for that financial year.
Gift Tax often gets ignored as taxpayers remain focussed on Income Tax. With new regulations, while wealth tax is no longer applicable, Gift Tax is applicable if you receive a gift in cash or kind that falls in the category of transactions above Rs 50,000.
(The writer is CEO of BankBazaar.com)