Cashing in on gifts

Gift tax, in its new avatar, is applicable only to the cash component.

In India, it is a tradition to give gifts on occasions such as weddings, birthdays, house-warming etc as we think that blessings should not be given empty-handed.

However, while earlier one would purchase utilities and other things for such occasions, the trend has shifted towards giving cash instead of gifting material goods. The reason behind the shift is a growing school of thought that it is best to give cash so that one could buy things of own's choice instead of having something thrusted on oneself.

The government, having realised this, has imposed a tax on cash gifts. As per the earlier tax regime, there was a gift tax and the donor i.e the person who gives gifts was liable to pay the tax at the rate of 30 per cent on the amount of the gift.

However, the gift was tax-free in the hands of the recipient. Under the new regime, from 1/10/98, the gift tax has been abolished. Also, the donor is not liable to pay any gift tax.

Moreover, in the financial year 2004-05, a new provision has been made under section 56(2)(v) for taxing the gift. This section is effective from 1/9/2004.

As per this section, if a sum of money exceeding Rs.25,000 was received without consideration by an individual or a Hindu Undivided Family (HUF) from any person on or after 1/9/2004, the entire sum shall be considered under the head 'Income from other sources'.

However, in an interesting move, while you can be taxed for accepting cash, you will not be taxed if you get a gift in kind, irrespective of the gift's value.

Further, if the value of a gift is even marginally above Rs 25,000, say Rs 25,001, the whole amount is added to the income of the recipient under the head "income from other sources".

There are certain exceptions to the above provision and under certain circumstances, such gifts shall not be treated as income. Under the following circumstances, the sum of money received as a gift is not treated as income:

a)From a relative or
b)On the occasion of the marriage of an individual or
c)Under a will or by way of inheritance or
d)In contemplation of the death of the payer The amount so received shall not be taxed under the Income tax.

The expression 'relative' for this purpose has been defined as:

1. Spouse of the individual
2. Brother or sister of the individual
3. Brother or sister of the spouse of the individual
4. Brother or sister of either of the parents of the individual
5. Any lineal ascendant or descendant of the individual
6. Any lineal ascendant or descendant of the spouse of the individual and
7. Spouse of a person referred to in items (ii) to (vi) mentioned above.

We will consider an example for this purpose.

Mr. A receives the following gifts :

1. Gift of Rs 30,000 from a friend on birthday
2. Gift of a T.V. set of Rs 29,000 from a friend on the occasion of House-warming.
3. Gift of jewellery of Rs 5 lakh from uncle.
4. Gift of Rs 50,000 from a friend at the time of marriage.
5. Gift of Rs 1 lakh from sister-in-law.
6. Gift of Rs 30,000 from employer.

Now we will see the tax liability of each gift to compute the income of Mr. A under the head, "income from other sources".

Gift of Rs 30,000 taxable: Rs 30,000

As the gift is in kind it is exempt.

Same as above, as it is in kind it is exempt.

Since gift is received on the occasion of marriage, it is exempt

As the gift is received from the relative and it is as per the definition of "Relative" considered for this section, it is exempt.

Gift from the employer is taxable as fringe benefit and the employer is liable to pay tax and this is exempt in the hands of the employee. -

Income from other sources: Rs 30,000 So while giving and accepting gifts, one should keep this provision of the income tax act in mind.