When Gifts Become Taxing

Gifts from close relatives are exempted from tax, but not the income arising from them.

- Himali Patel

The Gift Tax Act of 1958 was abolished in 1998, and with that those givers as well as giftees were no longer required to pay taxes on the gifts. However, this settlement led to bogus capital-building and moneylaundering cases.

Following this, former finance minister P. Chidambaram in the budget of 2004 stated: “I abolished Gift Tax in 1997. That decision remains, but the loophole requires to be plugged to prevent money laundering.” And with that, section 56(2)(v) was introduced under the Finance Act 2004 for taxing gifts in the hands of the receiver. Accordingly, today, any gifts received by an individual or Hindu Undivided Family (HUF) are taxed under the Income Tax Act, unless they fall under the category of any exemption.

Also the gifts, which are not under the exempt category, need to be disclosed in Income Tax Return (ITR) and taxes need to be paid accordingly. Failure of which can attract penalty. Naveen Wadhwa, DGM, Taxmann.com, said, “No special rates have been prescribed for taxability of gifts. The same shall be taxed at normal rates applicable on the recipient in the year of receipt of such gifts. Gifts need to be disclosed in ITR and any non-disclosure may attract the penalty of 50 per cent to 200 per cent of tax payable on income sought to be evaded.” Further the value of gifts needs to be included in the receiver’s total income that falls under the head ‘income from other sources’.