Gift gone wrong: How a tax-exempt Rs 1.3 crore family gift turned into a Rs 70 lakh tax shock

Receiving money from family is common in India—whether it’s a wedding gift, help from an NRI relative, or support during a financial crisis. But as a recent case shows, even a genuine gift can turn into a massive tax dispute if documentation isn’t handled carefully. Tax advisory platform TaxBuddy highlighted a case where a taxpayer, Prasanna, received Rs 1.3 crore from his NRI brother-in-law—an amount that is fully exempt under the Income Tax Act. Yet he still received a Rs 70 lakh tax demand.

The money came through proper banking channels. The identity of the donor was verified. The relationship was undisputed. But the tax officer still refused to treat it as a valid family gift. The controversy began because the gift deed was executed in the US, did not contain the recipient’s signature, and was prepared nine years after the transfer. The officer further argued that the donor’s source of funds wasn’t fully explained, and consequently taxed the entire amount as “income from other sources.”

Under Section 56(2)(x) of the Income Tax Act, monetary gifts received from a “relative” are exempt from tax. A brother-in-law is specifically included in this definition. The law does not require a gift deed for tax exemption—only proof of relationship and a clear money trail. With these two conditions satisfied, the officer’s interpretation stood on shaky ground.

When the case reached the Income Tax Appellate Tribunal (ITAT), the verdict was clear. The tribunal reaffirmed that a brother-in-law qualifies as a “relative,” making the gift automatically exempt. It also clarified a fundamental tax principle: if there is a question about the donor’s source of funds, the tax department must make additions in the donor’s assessment, not the recipient’s. Prasanna could not be taxed for someone else’s unexplained income.

The ITAT deleted the entire addition and restored Prasanna’s income and tax liability to their original levels — Rs 20 lakh and Rs 5 lakh, respectively. The tribunal criticised the tax officer’s approach as inconsistent with the law and the very intent of Section 56.

While a gift deed is not mandatory, experts advise that it is safer to maintain basic documentation when receiving or giving large gifts. This includes a simple gift deed mentioning the relationship, the donor’s ID, bank statements, and proof of funds. Gifts should always be routed through banking channels, and cash transfers should be avoided.

I-T dept on gift taxation

The Income Tax Department has repeatedly clarified the rules governing taxability of monetary gifts received by individuals and Hindu Undivided Families (HUFs). Under Section 56(2)(x) of the Income Tax Act, gifts or property received without adequate consideration are taxable unless they fall under defined exemptions. Gifts from “relatives” — including spouses, siblings, parents, lineal ascendants or descendants, and their spouses — are fully exempt. Monetary gifts received on the occasion of marriage are also tax-free, while gifts on birthdays, anniversaries or festivals remain taxable.

Immovable property received without consideration becomes taxable if its stamp duty value exceeds Rs 50,000, unless transferred by a relative. Other exemptions apply to inheritances, gifts made in contemplation of death, transfers from local authorities, approved institutions, and certain corporate reorganisations. Gifts from non-relatives become taxable when total receipts exceed Rs 50,000 in a financial year, and must be reported in Schedule OS of the ITR, while exempt gifts are disclosed in Schedule EI.

A recent case involving an NRI in the UAE illustrates how documentation lapses can trigger disputes. The taxpayer received Rs 80 lakh from his brother-in-law — a defined relative — through normal banking channels. Despite this, tax authorities treated it as taxable income citing issues with the gift deed’s timing and execution. The ITAT Kolkata Bench ruled that gifts from relatives qualify for exemption when identity, relationship and fund flow are established, and deleted the addition, noting that any inquiry about source of funds must be directed at the donor, not the recipient.