Our terrene is filled with people who are bound into close-knit families, having a lot of reasons to celebrate on various occasions. On such occasions, people exchange multiple gifts. Such gifts are a symbol of love and affection, but sometimes people exchange gifts as part of tax planning or tax evasion. So understanding Gift tax is very essential.
If the purpose of gifting is used for tax planning, it is as permissible by the law whereas, tax evasion is a prohibited act under the law and heavy penalties will be levied for tax evasion. Income tax had introduced gift tax before 1998 and giver of the gifts was taxed. Yet in 1998, gift tax was abolished. Subsequently, in 2004, a new tax on gifts was introduced in the Income Tax Act.
Income tax has brought into its certain purview transactions where there could be a chance of tax evasion by the giver. Gift tax provisions of a non-resident Indian are similar to that of resident with minor differences on who can gift a property, gifting limits etc.
Gift Tax provisions:
The following are few terms defined under the Income Tax Act, 1961, which help an assessee, understand better about gift tax provisions:
Coverage under gifts :
- Immovable property
- Immovable property being land or building or both,
- Shares and securities,
- Archaeological collections,
- Any work of art.
- Spouse (Husband or wife),
- Spouse’s brother,
- Spouse’s sister,
- Parents of the spouse,
- Lineal ascendants of individual or spouse,
- Brothers or sisters of parents of individual or spouse.
- Ornaments made of gold, silver, platinum or any other precious metal, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into wearing apparel,
- Precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel.
Stamp Duty Value:
The value adopted or assessed or assessable by any authority of the Central Government or a State Government the purpose of the stamp duty in respect of the immovable property.
When gift tax provisions were re-introduced in 2004, it included the cases on which tax is levied in the hands of the receiver –
- Gifts received by an individual other than relatives, in excess of ` 50,000 will be taxed in the hands of the receiver as gift tax.
- The value of the gift is added to the total income of the receiver under the head ‘Income from Other Sources’ and tax is calculated thereon.
- Gifts would be in the form of cash or kind. For gifts in kind such as property, jewellery, etc., valuation is done applying specific rules, and such asset must necessarily arise in India.
- In the case of immovable property, the value will be based on stamp duty of the property and in case of any other property as defined above value is based on the fair market value of such property.
Before we understand the provisions of gifting of properties and their tax implications, let us see to whom a non-resident Indian can gift property to or receive from and other instances of a non-resident Indian making or receiving gifts and whether they will be taxable or not –
- Non-resident Indian (NRI) can gift property to – A NRI can gift property, whether residential or commercial to:
- A resident Indian, or
- Another non-resident Indian, or
- Person of Indian Origin (PIO)
- A foreign national of non-Indian origin needs prior approval of the Reserve Bank to gift a property in India
- In the case of agricultural land, plantation land and a farmhouse can be gifted only to a resident Indian and not to another NRI/PIO.
- A resident individual is permitted to make a rupee gift to a non-resident Indian –
- Who is a close relative as defined under the Act,
- The amount of gift should be within an overall limit of USD 2,50,000 per financial year as permitted under the Liberalized Remittance Scheme (LRS)
- If permission as been taken by the resident individual under LRS, he can gift up to USD 2,50,000 without seeking permission from the Reserve Bank of India. Any amount above USD 2,50,000, RBI approval is required.
- The scheme of LRS is not available to corporations, partnership firms, HUFs, trusts, etc.
- When non-resident sends money to his account maintained in India that is NRO, NRE, or any other account, there will not be any tax on such transaction. NRI can gift from his NRE account to his/her parents in India without their parents suffering from tax.
- Non-resident Indians can gift in the form of cash, cheque, or any article or goods –
- To relatives – exempt from tax irrespective of the value of the gift,
- To non-relatives – exempt from tax up to ` 50,000 in aggregate in one financial year.
- If a non-resident Indian gift shares to an Indian resident –
- Such a gift would not be taxable in the hands of the donor, but
- Recipient of shares will be taxed in India, if the fair market value of such shares exceeds ` 50,000 and if the recipient does not qualify to be a relative.
There is a valuation aspect in case of the gift made in kind. The valuation of immovable property differs from that of other properties. Let us understand how are these two valued to pay gift tax on receiving such gifts –
In the case of Immovable Properties –
- If the property is gifted without any consideration and stamp duty value exceeds ` 50,000, gift value is the stamp duty value,
- If the property is gifted for sales consideration, then the actual cost of the property will be taken.
In the case of Other Properties –
- If gifted without consideration and fair market value exceeds ` 50,000, then fair market value will be taken,
- If gifted for sales consideration and the fair market value less sales consideration is greater than ` 50,000 then fair market value less consideration amount will be taken as the value of the gift.
Exemptions to the tax on Gifts –
The exceptions to the tax on gifts shall apply to any sum of money or any property received from:
- Any relative,
- On the occasion of the marriage of the individual,
- Under a will or by way of inheritance,
- In contemplation of death of the payer or donor,
- Any local authority
- Any fund or foundation or university or other educational institution or hospital or medical institution or any trust or institution referred to in Section 10(23C),
- Any trust or institution registered under section 12AA
Hence the new gift tax provisions were framed to avoid revenue leakage to the department. Every possible aspect where the individual could avoid gift tax is mentioned in the Act to eliminated tax evasion.