What Has Changed |
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| The budget has proposed to tax recipients for the following items gifted by unrelated persons if the total value exceeds Rs 50,000 in a year. |
| Property Stamp duty to be used to value property. Problems could arise if it’s sold below stamp duty value. |
| Shares Value of listed shares is clear, but unlisted shares are tricky. |
| Jewellery Fair market value of the item will be used to value the gift. Will curb evasion via gold gifts. |
| Artefacts Determining the value of an antique is prone to subjectivity. |
| Works of art Another tricky area. Not easy to value a work of art. Also, it could have been a gift from the artist. |
What Hasn't |
| Two important changes that should have been incorporated, but were ignored in the budget. |
| Gifts to daughters-in-law Discrimination continues. The income from assets given as gift is clubbed with that of the giver. |
| Gifts from first cousins They continue to be kept out even though their parents are in the list of specified relatives. |
It’s beautiful, it’s elegant and very appropriate. But don’t buy that diamond solitaire for your girlfriend. Why, you may ask. Because it costs Rs 55,000. Don’t get us wrong; we are not advising frugality. This is not about how much it will cost you. It’s about how much it will cost her! The changes proposed in the gift tax rules in this year’s budget mean that your friend will be taxed on the value of the gift you give her.
The gift tax rules are relatively simple. Gifts received from specified relatives (see box) and on certain occasions are not to be taxed. However, when it comes to unrelated persons, there is a limit of Rs 50,000 in a financial year. If one receives gifts worth more than Rs 50,000 in a year, the entire amount is added to one’s income for that year and taxed at the applicable rate. The amount is to be shown as income from other sources in the tax return form.
So far, these rules applied only to cash and one could avoid gift tax by giving gifts in kind. The budget has now plugged this loophole by proposing that non-cash gifts be taxed as well. From 1 October this year, the value of such gifts in kind (see box) will be included in the Rs 50,000 annual tax-free limit for gifts from unrelated persons. Now you know why that Rs 55,000 ring isn’t such a good idea. In the highest income bracket, it would add Rs 16,995 to your girlfriend’s tax liability, enough to turn her delight to despair.
Official sources say that this is another step in the government’s plan to reduce the evasion of income tax. “The amendment was necessary because many people were misusing the exemption on non-cash gifts to launder money and evade income tax,” says Sanjay Aggarwal, a Delhi-based chartered accountant.
The government’s attempt to plug the loophole in gift tax rules is laudable, but it has left several loose ends. The amended rules say that the fair market value of the gifts will be added to the recipient’s taxable income. This can be problematic because while the value of listed shares, gold and jewellery can be ascertained, “it is very difficult to determine the fair market value of unlisted shares, archaeological collections and works of art”, says Neeru Ahuja, partner in accounting firm Deloitte India. “So this could lead to disputes between the taxpayer and tax authorities,” she adds.
In case of property, the stamp value will be taken into consideration to fix the value of the gift. If the stamp duty value exceeds Rs 50,000, the recipient will be taxed for the full amount. However, there could be a problem if the property is sold for less than the stamp duty value. If the difference between the sale price and stamp duty exceeds Rs 50,000, this amount will be deemed as a gift to the buyer and he shall be taxed for it. This puts real estate bargain hunters at a disadvantage. “There may be genuine instances where the value of the immovable property is less than its fair market value,” says Ahuja. The budget has created confusion in this respect.
On the other hand, some pressing concerns have not been addressed. For instance, cousins continue to be kept out of the list of specified relatives from whom one can receive gifts without any monetary limitation.
Gifts from these relatives are not taxable |
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| Spouse, parents, siblings of self and spouse (and their spouses), siblings of either parent (and their spouses), lineal ascendants or descendants of self and spouse (and their spouses) |
Also, gifts to daughters-in-law attract income clubbing provisions. If one gifts cash to his or her daughter-in-law and the amount is invested subsequently, the income from the investment will be added to the income of the giver. Ditto for earnings from gifted property, shares and other assets.
Both clauses are begging for amendments. Why should first cousins be kept out when their parents are in the specified list? Why should a gift to a daughter-in-law be treated differently from one to a son-in-law? There is also need to review the limit of Rs 50,000, which was set more than three years ago. “Keeping in view the inflation rate, an increase in the limit should be considered on the same lines as the increase in the tax slab rate for individuals,” says Ahuja.
Coming back to the gift for your girlfriend, a good alternative could be a dress from an exclusive boutique or a high-end accessory from a designer label. Perhaps her favourite perfume or a snazzy cell phone? You could also consider giving a laptop. Feeling extravagant? Gift her a car. The tax authorities haven’t put these items on the list of taxable gifts. Not yet.
