Gift under Income tax Act Section 56(2)
Finance Income Tax Act

Taxation of Gifts Section 56(2)

In this article, we will discuss about the taxability of Gifts given by one person to another person. Gifts may be in the nature of the movable property or immovable property. Why taxation levied on gifts? What practice was followed before this?

Need of taxation of Gifts u/s 56(2)

Before the insertion of section 56(2) in the Income Tax Act, the practice of converting black money into white money was followed by the taxpayers through the transactions in the nature of gifts. To stop this practice the Government has come up with section 56 (2)(x). This section lays down law for the taxation of gifts.

Taxability of gifts section 56(2)

Section 56(2)(x): Taxation of Gifts received by Individual & HUF

Section 56(2) (x) is applicable in the case of Individual and HUF i.e. if gifts are received by Individual or HUF then only this section is applicable. Residential status of Donor or Donee maybe Resident or NR.

Following types of gifts are covered in section 56(2)(x)

1. Cash:

Gift in cash is taxable if the aggregate value of the gift in a year exceeds Rs. 50000/- the whole amount will be taxable in the hands of the receiver.

2. Gift of Movable Property:

a) Given Without consideration:

Where any person receives, in a previous year from another person any property ( other than immovable property) without any consideration, then if the aggregate fair market value of such property exceeds Rs. 50,000/-, the whole of the value of such property is taxable in the hands of the receiver.

b) Given For an Inadequate Consideration:

Where any person receives, in a previous year from another person any property ( other than immovable property) for inadequate consideration i.e. consideration which is less than its fair market value, then if the difference between fair market value and the consideration exceeds Rs. 50,000/- the whole difference amount is taxable in the hands of the receiver.

3. Gift of Immovable Property :

a) Given Without Consideration:

If any person receives, in any previous year, from any other person/s Immovable property without consideration and if the stamp duty value of such property exceeds Rs.50000/- then the whole of the stamp duty value shall be taxable in the hands of the receiver.

b) Given For an Inadequate Consideration:

If any person receives, in any previous year, from any other person Immovable property for a consideration which is less than the stamp duty value of such property, If the amount of difference is more than the higher of following:

(i) Rs. 50,000/-; Or

(ii) An amount equal to 5% of the consideration

The excess amount will be taxed in the hands of receiver of immovable property.

Some Exempt gifts

If gifts are received from the below-mentioned persons in the following situations then such gifts are exempt from tax.

Exemption on gifts

Note: In the above-mentioned points the term Relatives means

– Spouse of the Individual

– Sisters & Brothers of Individual

– Sisters & Brothers of Spouse of Individual

– Sisters & Brothers of either of the parents of Individual

– Any Lineal ascendants or descendants of the individual

-Any Lineal ascendants or descendants of an Individual’s spouse.

Below is the comprehensive list of the Donors as given in the definition of relative under I.Tax Act ( with Hindi connotation)

List of Relatvies for section 56(2)

Some Important Points to be remember :-

  1. Gifts received from a person who is covered in the definition of a relative is exempt.
  2. Gifts received on occasions except for marriage from persons who is not covered in relative shall be taxable under the head IOS.
  3. Gifts received in money whether in cash or through cheque if exceeds Rs.50000/- from a person other than a specified person shall be taxable.
  4. Gift on the contemplation of death is not taxable.
  5. If Huf receives any gift from its member then there shall not be any taxability in the hands of HUF.
  6. As per Hindu Law, a HUF cannot make any gift to any person such gifts are considered as void ab initio.

Also Read : 20 Important Income Tax Changes Applicable From 1st Apr 2020

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