Answer By law4u team
When it comes to giving or receiving large-value gifts, there are specific compliance requirements under the Indian Income Tax Act. Large-value gifts, typically those exceeding Rs. 50,000, may attract various tax obligations, including gift tax and income tax. Both the donor (giver) and the recipient (receiver) need to ensure compliance with the relevant provisions to avoid penalties or legal issues.
Compliance Requirements for Large-Value Gifts:
Gift Tax Provisions:
According to Section 56(2) of the Income Tax Act, if the value of the gift exceeds Rs. 50,000 in a financial year and is given by a person who is not a relative (as per the Act), the gift amount is subject to taxable income in the hands of the recipient.
Gift Tax Exemption for Relatives:
Gifts from relatives are generally exempt from gift tax. The definition of relative includes family members like parents, siblings, children, spouses, etc. If the large-value gift is received from a relative, no gift tax is applicable.
Documentation and Proof of Gift:
Gift Deed:
It is highly recommended (though not mandatory) to create a gift deed for large-value gifts. A gift deed is a legal document that explicitly mentions the details of the gift, including the name of the donor, recipient, amount, and date of the gift. The gift deed helps establish that the gift was voluntary and without any consideration (i.e., it was not a purchase).
Record of Transactions:
For large-value gifts, both the donor and the recipient should maintain proper records of the transaction. This may include bank statements, receipts, transfer documents, and other relevant paperwork that can substantiate the gift’s legitimacy.
Reporting the Gift in Income Tax Return (ITR):
Recipient’s Responsibility:
If a non-relative gives a gift worth more than Rs. 50,000, the recipient must report it as income in their income tax return under the head Income from Other Sources. The recipient will be taxed on the value exceeding Rs. 50,000 unless the gift falls under exempt categories (such as gifts from relatives).
ITR Form:
Large-value gifts received should be reported in ITR Form 1 or Form 2, depending on the nature of income. For gifts that exceed Rs. 50,000, the recipient should ensure they have declared the amount appropriately under the Other Sources section.
Exemption Limits for Large-Value Gifts:
Gifts received from relatives (as defined under Section 56 of the Income Tax Act) are exempt from tax, irrespective of their value. However, gifts from non-relatives exceeding Rs. 50,000 in a year will be subject to tax.
Example: If a person receives Rs. 1 lakh in cash from a friend, this amount must be declared in the ITR, and the recipient will be liable to pay tax on the Rs. 50,000 exceeding the threshold.
Valuation of Gifts:
If the gift is in the form of assets such as property, jewelry, or shares, the fair market value of the asset at the time of the gift will be considered for tax purposes.
For immovable property, a valuation report from a certified valuer may be required to determine its fair market value. Similarly, for gifts in the form of jewelry or art, an assessed value might be necessary.
Tax on Gifts in the Form of Property or Assets:
Immovable Property:
If the gift involves the transfer of property (such as land, house, etc.), the transaction may attract stamp duty and registration charges. The property transfer needs to be registered to be valid, and stamp duty may apply as per the state laws.
Example: If an individual gifts an immovable property (house or land) worth Rs. 50 lakh to a friend, the recipient must pay stamp duty on the market value of the property and report the gift in the ITR.
Capital Gains Tax on Gifts of Assets:
If the recipient decides to sell the gifted asset, capital gains tax will apply on the profits earned from the sale. The holding period of the gifted asset will be considered in calculating the capital gains.
The recipient will inherit the cost of acquisition and holding period of the asset from the donor. If the asset is sold within three years of receipt, it will be subject to short-term capital gains tax. If sold after three years, long-term capital gains tax will apply.
Gifts to Charitable Organizations:
Donations to registered charities are eligible for deductions under Section 80G of the Income Tax Act. If large-value gifts are given to a registered charity, the donor can claim deductions for the amount donated, subject to conditions and limits.
Foreign Gifts and Compliance:
If a person receives a gift from a foreign source (such as from a non-resident or from abroad), they must report this in their income tax return. Foreign gifts may also be subject to different compliance under the Foreign Exchange Management Act (FEMA) and other related regulations.
Penalties for Non-Compliance:
Failing to report large-value gifts appropriately or submitting incorrect information can lead to penalties or legal consequences. The Income Tax Department can levy penalties for underreporting or not declaring the gift.
Example:
Example 1: Gift of Money Above Rs. 50,000
Mr. Kapoor gifts Rs. 1,00,000 in cash to his friend. Since the gift exceeds Rs. 50,000, the recipient must report it in their income tax return under Income from Other Sources. The recipient will be taxed on Rs. 50,000.
Example 2: Gift of Property
Mrs. Sharma gifts her property (worth Rs. 30 lakh) to her son. Since the gift is from a relative, there are no gift tax implications. However, the son must pay the stamp duty and registration charges. If he later sells the property, he will pay capital gains tax on the difference between the sale price and the inherited value.
Conclusion:
For large-value gifts, compliance with Indian tax laws is crucial to avoid penalties. This includes gift tax considerations, proper documentation (such as a gift deed), and reporting the gift in the income tax return. Additionally, for property gifts, compliance with stamp duty and capital gains tax provisions is essential. Maintaining transparency and fulfilling all legal requirements ensures the smooth transfer of large-value gifts while minimizing tax liabilities.
