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How not to gift-wrap a tax

We tell you how to ensure that your gifts do not push up the recipient's tax liability.

Sonu Soni Iyerand Karishma Julka | Print Edition: November 15, 2007

Till about a decade ago, Indian tax laws did not encourage you to be large hearted. A curious anomaly existed in the provisions of the Gift Tax Act. If you gave money to someone as a gift, you were required to pay tax on the amount.

This was a hotly debated issue because it led to double taxation. A person paid tax on what he earned and then again paid tax on what he gifted out of his post-tax income. This ultimately led to the repealing of the Gift Tax Act in 1998. Though there was no tax on gifts, tax authorities routinely scrutinised such transactions to verify their authenticity.

Three years ago, in 2004-5, the government again put fetters on gifts by introducing a new tax provision. Only this time, the recipient was required to pay tax if the gift exceeded a certain value. The law states that up to Rs 50,000 received as gift by an individual during a financial year is not taxable. And this includes the total value of all gifts received by an individual.
INSTANCES WHEN MONEY GOT AS GIFT IS NOT TAXED
Gifted by close relatives (as defined below)
On the occasion of marriage of the individual
Under a will or by way of inheritance
In contemplation of death of the payer
From any local authority (a panchayat, municipal committee or district board)
From any charitable trust or foundation, educational institution, hospital or any notified fund such as the Prime Minister’s Relief Fund.

The specified relatives include spouse; brother or sister (and their spouses); brother or sister of spouse (and their spouses); brother or sister of either parent (and their spouses); any lineal ascendant or descendent (and their spouses); and any lineal ascendant or descendent of spouse (and their spouses). Sadly, the tax laws do not include cousins in the definition of “relative”.

However, there is no tax on money received as gift from your employer. Such gifts are covered under the Fringe Benefits Tax.

What needs to be especially noted is that there is no tax free threshold in case of gifts. If the gifted amount exceeds Rs 50,000 by even Re 1, the whole amount is clubbed with the income of the individual and is taxed at the applicable tax rate. There’s no deduction available in this regard. The gifted amount is to be shown as “income from other sources” in the tax return form. These rules are applicable to an individual as well as a Hindu Undivided Family (HUF).

Let us look at a situation where a young girl is gifted Rs 51,000 by her cousins on the occasion of Raksha Bandhan. Since the gifted amount exceeds the tax-free limit of Rs 50,000, it will be added to her total taxable income for the year. This gift of Rs 51,000 will affect her tax liability at different income levels in different degrees. In the highest tax slab (30%), the gift adds a burden of Rs 15,759 to her annual tax liability.

The point to be noted here is that if she got only Rs 50,000, she is saved from that additional tax burden. So Rs 1,000 made all the difference. The taxman is not very hardhearted though. He does not levy any tax on money received as gift from certain specified relatives and on certain occasions. There is no limit on the money received in these cases.

So, what do you do if you want to give a gift to a very close friend or cousin? Don’t lose heart. It is possible to receive gifts without having to pay any tax. The law only seeks to tax “sum of money”. Gifts in kind are not covered under the provisions.

Perhaps our young friend needs to ask her cousins to give her a fancy LCD TV instead of giving her money. She could even receive a piece of diamond jewellery she has been eyeing for sometime. This will ensure that her tax liability does not shoot up due to the gifted money. That is why gold coins and gold biscuits are so popular as gifts on certain festive occasions.

A word of advice. The money should preferably be gifted in the form of a cheque, a demand draft or a pay order. That would help in proving the source of the money should the taxman raise an objection about the gift transaction. If the gift is in kind, it may be wise to hand over the cash memo to the recipient. It would help in establishing that the item was given as a gift.

Another important thing to keep in mind while gifting is the clubbing provision in the income tax laws. Income from an asset given as a gift to certain family members (such as spouse or children) is clubbed with the income of the donor.

This clubbing provision helps check tax evasion. For example, if a husband gifts a flat (which has been let out) to his wife who does not have any taxable income otherwise, then the rental income from the flat is taxable in the hands of the husband and not the wife. Also any capital gain tax arising on sale of such a flat will be taxable in the husband’s hands.

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