Law Relating to Tax on Gifts from Relatives

Many of us believe that gifts from relatives are exempted from tax. But many of us are ignorant of the fact that gifts received from non-relatives can be totally exempt from income tax too.

Present law relating to tax on gifts:

People often receive gifts from friends and near relations.  Sometimes, gifts are also received from NRls. According to the Income Tax Act, 1961 people can get total exemption from income tax for gifts during the current financial year.

Which kinds of gifts are taxable?

According to Section 56(2)(vi) of the Income Tax Act, 1961 some of the gifts are chargeable to income tax under the head “income from other sources”. But it is applicable only to individuals and Hindu Undivided Families (HUFs). In case of gifts received by any Trust, the same is not chargeable to income tax under the head “income from other sources”.

When someone makes a gift in cash or in kind, there might be a tax liability. According to the current law if any gift is received in cash or kind amounting to more than Rs.50, 000, it is taxed under the head “income from other sources.”

The provision of taxation of gifts was applicable before 1.4.2006 in cases where the gift amount was more than Rs. 25,000. But since 1.4.2006, the amount is increased to Rs. 50,000. Thus cash gifts and gifts by cheque or draft from non-relatives and gifts that were normally non-exempted could be totally exempt from income tax till Rs. 50,000 in total during one financial year.

Meaning of the term “relative”:

As per Section 56(2)(vi) the term “relative” means: ­

(i)Spouse of the person;

(ii)Brother or sister of the person;

(iii)Brother or sister of the spouse of the person;

(iv)Brother or sister of the parents of the person;

(v)Any ascendant or descendant of the person;

(vi)Any ascendant or descendant of the person’s spouse; and

(vii)Spouse of the aforesaid relations.

Which kinds of gifts are exempted?

The following gifts are tax free:

1. Gifts received on occasion of the marriage ;
2. Gift received through a will or by way of inheritance;
3. Gifts received in contemplation of death.
4.  Gifts received  from any local authority;
5.  Gifts from any fund or university or any other kind of educational institution, etc.
6.  Gifts from any public charitable trust or institution under Section 12AA of the Income Tax Act.

In view of the above fact sit can be concluded that scholarships or grants received from an educational or a charitable institution can be fully exempt from income tax in the hands of the donee having no limit provided the institution is a registered one following the provisions of under Section 12AA.

Similarly all gifts by virtue of a Will, and any sum received upon the death of a person by way of inheritance are totally exempt from income tax.