Mukesh Patel.in
practical tax & investment planning online
international tax expert / columnist / author / speaker

GIFTS FROM RELATIVES TAXFREE!

No stamped document required for gift of movable property,

But it is advisable to keep letter of gift from donor on record!

Several AM readers poured in their questions in response to the article last Monday on gifts and income-tax liability. Some of these queries which touch issues of popular interest are replied hereunder:

 LIST OF RELATIVES COVERED

Query:  Your article states that gifts received by an individual from his relative are treated as exempt, even beyond Rs.50,000 in a year. Can you please elaborate which relatives are covered for this purpose?

 Reply: One of the important exceptions provided under Section 56 of the Income-tax Act, in regard to taxing gifts as income, is in respect of sums received by any individual from his/her relative out of natural love and affection.  For this purpose, the term ‘relative’ has been defined to include the individual’s spouse, brother or sister of the individual or spouse, brother or sister of either of the parents of the individual, any lineal ascendant or descendant of the individual or spouse and finally the spouse of any of the above-referred persons. 

 Lineal ascendants of an individual would include his father, mother, grandfather, grandmother and so on.  Lineal ascendants of the spouse would include in-laws of the individual in the like category.  Similarly, lineal descendants of the individual and the spouse would cover their son, daughter, grandson, granddaughter and so on.  Thus beyond the direct parent-child relationship, Dada-Dadi, Nana-Nani, Pota-Poti etc. all get covered within the meaning of the term ‘relative’ from whom any gift received is treated as fully exempt.

 Moreover, apart from the closest members of the immediate family such as parents, children, brothers and sisters, even uncles and aunts (such as Kaka-Kaki, Mama-Mami, Masa-Masi, Foi-Fua) and also in-laws in these categories have been empowered to give tax free gifts without any monetary limits. 

 However, it needs to be borne in mind that cousins, nephews and nieces have been kept out of the list of ‘relative’ for the above purpose.

GIFT IN KIND FROM NON RELATIVE

 Query:  I am a Doctor planning to procure an expensive instrument worth Rs.50 lakhs, which has also public health application.  A cousin of mine inUSA proposes to pay for the same and send the same to me as a gift.  Will this attract any income-tax liability in my hands?

 Reply:  There are two important aspects to be considered under your question.  Firstly, whether your ‘cousin’ can be considered as a relative within the meaning of Section 56(2)(vi)?  The answer is ‘No’, since ‘cousin’ does not fall within the definition of ‘relative’ for the purpose of gifts being treated as exempt from income-tax.

 However, you should note that Section 56(2)(vii) casts income-tax liability only in respect of a ‘gift in kind’ exceeding Rs.50,000 which is covered in the list of nine specified properties, including land & building, shares & securities, bullion, jewellery, archaeological collections, drawings, paintings and any work of art. The gift of the medical instrument, though exceeding Rs.50,000 in value, would clearly fall outside the liability for income-tax, since it does not fall in this list. You may, therefore, go ahead and procure your public health application without any worry or concern.

 LEGAL PROCEDURE FOR GIFT

Query: I am a retired Government Officer. I intend to gift some of  my investments to my major son so that I can also  derive  the benefit  of  income-tax  saving, since I am  in  the  maximum  tax bracket  and he is not having any taxable income.  Kindly let me know the legal procedure for the same.

 Reply: Under the Transfer of Property Act, while the gift of an immovable  property  cannot  be effective or  complete  until  the execution of a registered gift deed, attested by signatures of two witnesses  alongwith  the signature of the donor of the  gift,  no such  requirement is prescribed in regard to a gift of  a  movable property.   Under this law, the only requirement is delivery of possession of the movable property by the donor to the donee and acceptance by the donee of the same.

 Accordingly,  it  is  not necessary for you  to  execute  any stamped  document  in support of the gift you propose to  make  to your  son.  It would, however, be advisable for you to  address  a forwarding letter to your son, stating clearly that you are making a  gift  to  him out of natural love and affection  borne  by  you towards  him  and  also  mentioning  the  details  of  the  gifted property  (for  example, date and number of the cheque  or  draft, name of the bank and amount, etc. as the case may be).  This would act as supporting evidence in the case of your son, when in future, he may be required to explain the source of the investment held by him and the income derived therefrom.  Your son should confirm acceptance of the said gift by way of acknowledgement.

 In case of gift of shares, units or bonds, it would be necessary for you to execute a transfer form for the said purpose.  In case of gift of a fixed deposit, you may prefer to also address a letter to the bank or the financial institution, informing them regarding the gift and requesting them to take the name of the donee on their record.

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