Mukesh Patel.in
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PRACTICAL CASE STUDIES ON TAXABILITY OF GIFTS

Specified gifts received in cash or kind exceeding Rs.50,000 in value during the year are treated as income liable to tax !

       Section 56(2)(vi) had cast income-tax liability only in respect of a ‘gift of any sum of money exceeding Rs.50,000’. In view of this clear language, any gift received in kind (not being any sum of money) clearly fell outside the liability for income-tax, irrespective of the value of such gift.

       However, as per the provisions of Section 56(2)(vii) introduced with effect  from 1st October, 2009, in case of nine specified properties as mentioned hereunder, received by an individual or HUF, either by way of gift or for a purchase consideration that is treated by the Assessing Officer as inadequate, the market value of such gift or the differential value of such purchase, if exceeding Rs.50,000, will be taxed as income from other sources.

 i. Land and building; ii. Shares and securities; iii. Jewellery; iv. Archaeological collections; v. Drawings; vi. Paintings; vii. Sculptures; viii. Any work of art; ix. Bullion.

        Interestingly, with only nine properties specified in the hit list, a host of other valuables such as motor cars, electronics, furniture, air tickets etc. have still been kept out of the tax purview and you can thus enjoy the luxury of receiving gifts of any of these even beyond October, 2009.

        In the above regard, exceptions have been carved out in respect of any sum of money received from any relative (as defined for purpose of this section) or on the occasion of the marriage of the individual or under a will or by way of inheritance or in contemplation of death of the payer or receipts from any local authority as defined in Section 10(20) or fund, foundation, university, educational institution, hospital or other medical institution referred to under Section 10(23C) or receipt from any trust or institution registered under Section 12AA and accordingly such receipts will be exempt from tax.

        Some interesting Case Studies in respect of gifts received by an individual or a Hindu Undivided Family are discussed hereunder:

Gifts from Relative not taxable

Case Study-1: A receives a gift of Rs.5,00,000 from his maternal uncle B. This gift, being from a relative as defined under the meaning of ‘relative’ under Section 56, will not be liable to be taxed as income.

 Gifts on Marriage fully tax exempt

Case Study-2: P receives cash gifts (Chanlla money) of Rs.5,50,000 from both friends and relatives on the occasion of his wedding. Gifts received on the occasion of marriage being fully exempt, there will be no tax liability in respect of the same.

 Gift to HUF calls for caution

Case Study-3:  M is desirous of gifting a cheque of Rs.8,00,000 to the HUF of his son N, thinking that his son’s HUF will not attract any tax impact, in view of the father-son relationship.  However, this gift needs a word of caution.  The term ‘relative’ as defined under the section speaks of relationships only qua an individual.  Since the recipient of the proposed gift is N’s HUF and not N as an individual, the gift of money made by M would be liable to be taxed as income in the hands of the HUF of his son N. 

 Money received on Inheritance or under Will not taxable

Case Study-4:  If on the facts of the above Case Study-4, the HUF of N receives the money either through inheritance or under the Will of his father M, the same would be covered within the exclusions under this section and hence not taxable as income.

Where gift exceeds Rs.50,000

Case Study-5: R receives a gift cheque of Rs.75,000 from his friend. Section 56(2)(vii) provides that in case of a gift of any sum of money exceeding Rs.50,000, the whole of such sum shall be treated as income. Rs.75,000 will be accordingly liable to tax as income in this case.  

Multiple Gifts below Rs.50,000

Case Study-6:  On his 40th birthday, S receives 4 gift cheques of Rs.40,000 each, from four different friends. Can S contend that since no single gift exceeds Rs.50,000, the aggregate amount of the four gifts being Rs.1,60,000 is not liable to tax? Section 56(2)(vii) provides that “where any sum of money, the aggregate value of which exceeds Rs.50,000 is received without consideration by an Individual or HUF from any person or persons, the whole of the aggregate value of such sum shall be treated as income.” The terminology ‘aggregate value of such sum’ and ‘received from any person or persons’ under the said provisions, makes all multiple gifts, received from more than one person, also taxable, where the aggregate value of such gifts exceed the new limit of Rs.50,000. 

Invest & Rest

Case Study-7:  Not aware of the tax implications on gifts, Mrs. X has already received in April,2011 a foreign currency gift equivalent to Rs.2,75,000 from a family friend in theUnited States.  Although she has no other taxable income she is now worried of the income-tax burden on the monetary value of this gift. A thoughtful and timely investment strategy can save tax of Rs.8,500, which Mrs. X would be otherwise required to pay.  She can invest Rs.90,000 in any tax saving investments such as PPF, NSC, ELSS etc., which are eligible for deduction under Section80C.  Although the amount of Rs.2,75,000 would be treated as taxable income of Mrs. X in FY 2011-12, she would still be eligible for the deduction of Rs.90,000 under Section80C.  This would leave the balance taxable income of Rs.1,85,000, which fortunately being within the personal tax exemption limit of Rs.1,90,000 for female taxpayers during FY 2011-12, the end result for her would be zero tax liability.

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