Taxability of gifts is a question that frequently arises in the minds of taxpayers. In this article, you will gain knowledge about various provisions regarding taxation on gifts received by an individual or a Hindu Undivided Family (HUF) i.e., gifts received without consideration or with insufficient consideration.

What Is a Gift Deed?

The gift deed is basically a legal document through which the owner of immovable or movable property transfers his/her property to another person without consideration as a gift voluntarily. Though it is not compulsory to execute a gift deed while gifting any asset, it does create a valid documentary record. Any document that records gifting of movable or immovable property is considered a gift deed.

• A donor - is a person giving the gift. A donee - is a person who receives the gift.

• A gift is classified in the following ways from a taxation perspective:

• Money that is given without consideration is called a 'monetary gift'.

• The term 'gift of movable property' refers to movable properties received without consideration.

• A movable property that has been received at a lower price (i.e. for insufficient consideration) can be considered as a ‘movable property received for less than its fair market value’.

• 'Gift of immovable property' refers to immovable property received without consideration.

• 'Immovable properties received for less than its stamp duty value' are those acquired at a reduced price (i.e. for insufficient consideration).

Parties in a Gift Deed

Two parties are involved in a gift deed, the donor and the donee. Donor is someone who gives the gift, and donee is someone who receives the gift. It is important that the donor should be of sound mind and capable of entering into agreements at the time of making a gift.

It is illegal for a minor to gift the property as he/she is incapable of entering into contracts. A guardian of a minor can, however, accept gifts given to the minor on the minor's behalf. The donor should not receive anything from the donee in exchange for making the gift.

Clauses in a Gift Deed

A gift deed includes the following clauses:

• Details of Donor and Donee – The gift deed should include the name, address, and relationship of the donor and donee.

• Consideration – In the gift deed, the donor should indicate that he is transferring the property out of love and affection towards the donee, and no other consideration of any type is involved.

• Voluntary Transfer – The donor should specify in the gift deed that ownership of the gifted property is being transferred voluntarily and freely to the donee. The transfer shall be free of any fear, coercion or threat.

• Ownership of Property – The gift deed should specify that the gift property exists and that the donor owns it completely.

• Property Details – In the gift deed, the gift property should be described in detail.

• Rights of the Donee – In the gift deed, the donee's rights should be mentioned. A donee's rights include the right to enjoy the property peacefully and to sell, mortgage or lease the property.

• Acceptance by Donee – The gift deed must state that the donee accepts the gift.

• Intention – In the gift deed, it should expressly or implicitly state the intention to transfer possession of the gift property.

• Witnesses - The gift deed should include the names and addresses of witnesses. A minimum of two witnesses must sign and attest the document.

• Revocation – The gift deed does not have to contain a revocation clause, but it is advisable to avoid any future disputes.

The Process of Gifting Through a Gift Deed

The complete process of 'gifting' through a gift deed can be divided into three steps. They are:

1. Drafting of a Gift Deed: Drafting of the deed is usually done through a lawyer. The draft of the gift deed suggests the transfer of property from the donor to the donee. The gift deed should have been drafted as per the Indian Registration Act, 1908.
2. Acceptance of Gift: The signature of the donee is needed for acceptance of the gift deed. One essential factor is that the gift should be accepted during the lifetime of the donor. If not, it may stand invalidated. In other words the donor and the donee must be alive when registering the deed.
3. Registration of Deed: Stamp duty has to be paid corresponding to the value of the gift. The document also requires the signature of witnesses along with the signature of donor and donee. Registration is done as per the provisions of Indian Registration Act,1908 and Transfer of Property Act. Unless registration of the gift deed is completed, the title does not pass on to the donee, in case of gift of immovable property.

Points to Note

• Minors are not legally capable of signing contracts, so they cannot make gift deeds. On behalf of the minor, the guardian may accept a gift but cannot gift minor’s property to someone else.

• Once a gift has been given, it cannot be withdrawn.

• Gifts made to specified relatives as mentioned in the Income Tax Act are exempt from tax in the hands of the donee.

• Types of Gifts - Non Taxable Gifts and Taxable Gifts

Non-taxable Gifts

Individuals and HUFs will not be charged tax on monetary gifts or immovable property or prescribed movable property received as gifts in the following cases:

• A gift received from a relative. By relative, we mean:

• In case of an Individual:

• Individual’s spouse

• Individual’s brother or sister

• Brother or sister of the spouse of an individual

• Either of Individual’s parent’s brother or sister

• Individual’s lineal ascendant or descendent (if any)

• Individual’s spouse’s lineal ascendant or descendent (if any)

• A spouse of an Individual referred to in (b) to (f)

• Friend is not considered as a ‘relative’ as defined in the above list as per income tax act and hence, gift received from friends will be charged to tax (if other criteria of taxing gift are satisfied).

In case of HUF,

Any member of the HUF.

• Money received by the individual on the occasion of his/her marriage. Apart from marriage there is no other occasion when monetary gift received by an individual is not charged to tax. Hence, monetary gift received on occasions like birthday, anniversary, etc. will be charged to tax.

• Money received in a will or as an inheritance.

• Money received in contemplation of the demise of the payer or donor.

• Money received from a local authority [as described in the Explanation to section 10(20) of the Income-tax Act].

• Money received from any foundation, fund, university, hospital or other medical institution, other educational institution, any trust or institution referred to in Section 10(23-C).

• Money received from a trust or institution registered under section 12AA or section 12AB.

• Shares received in connection with a demerger or merger of a company under section 47, Clause (vi-d) or Clause (vii), respectively.

• Under Section 47(vicb), shares received as a result of a business reorganisation of a co-operative bank.

Taxable Gifts

Other than the above exempt category, the following kinds of gifts are taxable in the hands of the recipients:

1.Money

Money can be given in cash, by cheque, or electronically. If the aggregate value of monetary gift received during the year by an individual or HUF exceeds Rs. 50,000 and the gifts are not covered under the exceptions discussed above, then gifts whether received from India or abroad will be charged to tax as 'income from other sources'.

The important point to be noted in this regard is the “aggregate value of such sum received during the year”. The taxability of the gift is determined on the basis of the aggregate value of gift received during the year and not on the basis of individual gift. Hence, if the aggregate value of gifts received during the year exceeds Rs. 50,000, then total value of all such gifts received during the year will be charged to tax (i.e. the total amount of gift and not the amount in excess of Rs. 50,000). Gifts will be charged to tax on the basis of applicable slab rate.

2.Immovable Property

Individuals may receive land or buildings as gifts for Inadequate consideration or without consideration at all.

If the following conditions are satisfied than immovable property received without consideration by an individual or HUF will be charged to tax:

Immovable property, being land or building or both, is received by an individual/HUF.

The immovable property is a capital asset with in the meaning of section 2(14) for such an individual or HUF.

The stamp duty value of such immovable property received without consideration exceeds Rs. 50,000.

But in the following cases, gift of immovable property will not be charged to tax.

Property received from relatives.

Relative for this purpose means:

i. In case of an Individual

• Spouse of the individual;

• Brother or sister of the individual;

• Brother or sister of the spouse of the individual;

• Brother or sister of either of the parents of the individual;

• Any lineal ascendant or descendent of the individual;

• Any lineal ascendant or descendent of the spouse of the individual;

• Spouse of the persons referred to in (b) to (f).

ii. In case of HUF, any member thereof.

• Property received on the occasion of the marriage of the individual.

• Property received under will/ by way of inheritance.

• Property received in contemplation of death of the donor.

• Property received from a local authority [as defined in Explanation to section 10(20) of the Income-tax Act].

• Property received from any fund, foundation, university, other educational institution, hospital or other medical institution, any trust or institution referred to in section 10(23C).

• Property received from a trust or institution registered under section 12AA or section 12AB.

• Taxability of immovable property received without consideration :

In the case, where the property is received without consideration (i.e., without payment) and the stamp duty value (i.e., value adopted by the authorities to calculate stamp duty) exceeds Rs 50,000 than the entire stamp duty value of the property is chargeable to tax .

Taxability in a case where an immovable property is received for less than its stamp duty value :

• If following conditions are satisfied, then immovable property received by an individual or HUF for less than its stamp duty value will be charged to tax:

• Any immovable property is acquired by an individual or a HUF.

• The immovable property is a ‘capital asset’ within the meaning of section 2(14) of the Act for such individual or HUF.

• Such property is acquired for a consideration but the consideration is less than the stamp duty value and the difference exceeds higher of Rs. 50,000 and 10% of the actual consideration.

In other words, if an individual purchases a capital asset, being an immovable property, and the stamp duty value of such property exceeds actual consideration by higher of Rs. 50,000 and 10% of the actual consideration, then the excess of stamp duty value over the purchase price will be charged to tax in the hands of the purchaser.

For instance, if the stamp duty value is Rs 10,00,000 and the consideration is Rs 7,50,000. As a result, the difference of Rs. 2,50,000 (which is higher than Rs. 50,000 and 10% of the consideration, i.e., Rs. 75,000) will be taxable in the hands of the recipient as income from other sources.

3. Moveable Property

If the following conditions are satisfied then value of prescribed movable property received by an individual or HUF will be charged to tax:

• Prescribed movable property is received without consideration (i.e., received as gift). And

• The aggregate fair market value of such property received by the taxpayer during the year exceeds Rs. 50,000.

• In above case, the whole amount of fair market value (not the difference between FMV and 50000) of the prescribed movable property will be treated as income of the receiver.

• Prescribed movable property includes shares/securities, jewellery, archaeological collections, drawings, paintings, sculptures or any work of art and bullion, being capital asset of the taxpayer. It is a exhaustive definition that means anything other than above are not included in prescribed movable property. In other words, nothing will be charged to tax in respect of gift of any item being a movable property other than covered in the above definition, e.g., Nothing will be charged to tax in respect of a motor car received as gift, because a motor car is not covered in the definition of prescribed movable property.

Taxability when prescribed movable property is received by an individual or HUF for less than its fair market value :

If the following conditions are satisfied then prescribed movable property (meaning has been discussed earlier) received by an individual or HUF will be charged to tax:

• Prescribed movable property is acquired by an individual or HUF.

• The aggregate fair market value of all such properties is higher than the consideration paid and the difference is more than Rs. 50,000.

• For instance Mr. A purchased gold jewellery for Rs. 2,34,000, the fair market value of gold jewellery is Rs. 3,54,000. In this case the excess of fair market value over the purchase price will amount to Rs. 1,20,000 which is more than Rs. 50,000. Hence, the entire excess of fair market value over purchase price i.e. Rs. 1,20,000 will be charged to tax in the hands of Mr. A. It will be charged to tax under the head “Income from other sources”.

4. Tax Implications for the Giver of Gifts/ Money Transfers

The above situations are examples of gifts/values of assets that are taxable at the recipient's hands. Despite this, there are certain instances when a gift could have tax implications for the giver in order to prevent tax evasion and protect the revenue. Examples include:

• Let's say a person rents out their house and the rent is paid to their spouse, parents, or children. In such a case, the rent would be considered to be the individual's income and he/she would be taxed accordingly. Regardless of whether rent is paid directly to the individual's specified relative(s), it will be treated as a gift by the individual to those relatives, but firstly it will be treated as income of an individual. As a result, gifting rent directly does not remove the house owner's tax liability.

• Parents often open bank accounts for their minor children and deposit money into them. Obviously, the parents are gifting their children money from their tax-paid income. The receivers i.e., the children would be exempted from paying taxes on this gift. Nonetheless, tax purposes would classify the interest earned from such bank deposits as part of the parent's income. It is common for the income of a minor child, unless earned by manual labour, application of skill, talent, or specialised knowledge, to be clubbed with the income of the higher-earning parent. However, if the parents are no longer married, it will be included in the income of the parent who is raising the child.

• Nonetheless, a variation of this does not have the same consequences. Say, for instance, that working children give their parents money and that money is invested in bank FDs or mutual funds under the name of the parents. Children will not be taxed on the interest earned from that bank FD or the capital gains from mutual fund investments. It will be considered as the parents' income. In this case, therefore, there will be no tax implications for the giver, i.e., the working child.

It is advised to maintain sufficient documentation of gifts (such as gift deeds etc.) to ensure that genuine cases of gifting do not fall under the above situations and be taxed unjustly. Individuals are also required to evaluate their transactions to determine whether they fall under any of the taxable scenarios discussed above. In this case, they should voluntarily disclose the income in their individual income-tax returns to ensure compliance.

Gift Tax in India

As of 1 April 2017, gifts are taxed under Section 56(2)(x) of the Income Tax Act, 1961. Whenever a person receives a gift (includes money, immovable property or movable property) of more than Rs.50,000 without consideration, the entire amount will be taxed in the hands of the donee under a separate heading titled 'Income from other sources'.

Provisions Regarding Stamp Duty

Consideration of stamp duty value is similar to the provisions under Section 50C. Let us discuss in brief the provision for gift tax purposes below:

• Stamp duty value needs to be taken into account when computing gift tax on immovable property. Stamp duty values, however, can be higher for numerous reasons, and one of them is a considerable period of time between the date of agreement and the date of registration. The following conditions must be met for stamp duty value to be considered for gift tax purposes:

• There is a difference between the date of such an agreement and the date of registration; and

• The consideration is either fully or partially paid with an account payee cheque, bank draft, or electronically through a bank account on or before the date of transfer agreement

• In addition, in case the taxpayer questions or contests the stamp duty value adopted by a stamp duty valuation authority according to Section 50C, the tax officer must refer the valuation to a valuation officer (VO), who must request records, give the taxpayer an opportunity to be heard, and pass an order in writing on the value he has arrived at. A lower of stamp duty value or value arrived by VO is to be considered for gift tax purpose

Exceptions from Gift Tax

As mentioned above, certain specified gifts received from any person or persons are subject to gift tax. However, there are some exceptions to this rule.