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

Three More Days Before Your Gifts Get Taxed As Income!

Purchases Below Fair Market Value Also

Trapped In Tax Net From 1st October’09

If your friend had promised you to gift a diamond studded gold watch worth Rs.3 lakhs, encash that promise in three days. Delay may cost you dear, since the receipt of this gift after 30th September, 2009 will be treated as your taxable income, attracting a straight income-tax of Rs.92,700, if you fall in the top tax-bracket of 30.9%.

Currently, only gifts of any sum of money (and not gifts in kind) in excess of the prescribed limit of Rs.50,000 are taxed as income in the hands of the recipient individual or HUF, subject to specified exceptions such as receipts from relatives or on the occasion of marriage or under a will.

Eight specified Gifts in kind in tax trap

            However, as per the new provisions of Section 56(2)(vii) introduced by the Finance Act, 2009 and slated to be effective from 1st October, 2009, eight specified properties, including land and building, shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures and any work of art, 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, then 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.

             Interestingly, with only eight 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.

            Fortunately the specified exceptions, such as receipts from relatives or on the occasion of marriage or under a will, as currently applicable to cash gifts will continue to apply in case of gifts in kind also. However, the definition of ‘relative’ will apply not as understood in the common parlance, but as prescribed in Section 56. To illustrate, you may consider receipt of gift from your cousin or nephew as coming from your relative, but watch out! The Income-tax Act does not recognize the same as such.

Taxman can spoil your Party!

             From 1st October, 2009, you would no longer be able to enjoy the thrill of having successfully negotiated a purchase deal for property well below its fair market value, because the taxman will be there to share nearly one third of your saving.

           While gifts in kind were expected to be trapped in the tax net, ever since monetary gifts came to be taxed as income since September, 2004, what has really baffled taxpayers and tax experts alike is the callous provision to place purchase consideration of properties both immovable and movable, under the scanner of fair market value (FMV), the determination of which can be highly subjective and discretionary. If you are wondering how such a weird provision got to creep in the Finance Act, 2009, you ought to know that this has been bodily lifted from the proposed Direct Tax Code, several provisions of which have become a subject of heated debate.

             The new provisions state that in case of an immovable property, the FMV shall be the ‘stamp duty value’ of the property. In case of movable properties, such FMV shall be determined in accordance with the method prescribed. It is truly mind boggling to think as to how the tax rules will lay down a logical basis for valuing items such as paintings, sculptures and works of art, the valuation of which has confounded even the most veteran of experts. Just because you have been fortunate to bargain a good price for a Hussein painting, the taxman can very much decide to spoil your party! But not until another three days atleast!

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