There is no gift tax but gifts received from persons and circumstances (other than those specified as exception) are taxable.
The exceptions mainly covered in Section 56(2) of the Income tax Act are any sum received (a) from any relative; (b) on the occasion of the marriage of the individual; (c) under a will or by way of inheritance; (d) in contemplation of the death of the payer; (e) from local authority; (f) from any fund, foundation, university or other educational institution, hospital and other medical institution, any trust or institution covered in Section 10(23C); (g) from trust or institution registered under Section 12AA.
From the above it is clear that the provisions of charging tax under Section 56(2) will not apply in respect of any sum received under a will.
It will be relevant to note that since 1 April 2006, any sum of money, the aggregate value of which exceeds Rs 50,000, received without consideration by an individual or a Hindu Undivided Family (HUF), in any previous year from any person or persons, is considered income of the individual or the HUF. Prior to 1 April 2006, it was possible to accept a gift of up to Rs 25,000 each from various persons and no aggregate limit was fixed.
The tax benefits of a will are encapsulated below:
• Will can be made in favour of any person, even those who are not covered in the definition of “relative” under Section 56(2), and thus income tax on gifts can be saved. The will’s beneficiary can be a woman or a minor and even a society or trust. Thus the testator (will maker) can so plan his bequest that it attracts the least amount of tax in the hands of beneficiaries or legatees.
• Property passed through a will won’t be subject to the capital gain tax—it is exempt under Section 47(iii).
• Property can be passed to the HUF of the sons of the testator, thus providing a separate assessable entity.
• Property can be passed to a trust, created through the will, for the benefit of specified beneficiaries with ascertained shares or for society at large.
• The will can be made for both self-acquired property and the share of the testator in HUF property.
Having a will also means that the property can be given to chosen beneficiaries. In addition, a proper will helps in keeping amity and good relations among beneficiaries.
It may be noted that “relative” for the purpose of exception under Section 56(2) for not charging tax on gifts include spouse, siblings of the taxpayer or his spouse, brother or sister of either parent, any lineal ascendant or descendant of the taxpayer or his spouse and the spouse of the aforesaid persons.
Interestingly, if a nephew gets a gift from his uncle it won’t attract income tax but the reverse becomes taxable. Likewise gifts received from first cousins are taxable. But there is no such barrier if the money is channelled through a will.
(By Narayan Jain, Advocate and author of How To Handle Income Tax Problems)
