Tax Treatment for gifts

Tax Treatment for gifts received from relatives

A gift is an item given to someone without the expectation of payment or anything in return. An item is not a gift if that item is already owned by the one to whom it is given or if any consideration is taken against the said transfer of ownership. There are situations in the day to day life when the relatives give gifts to each other and these gifts maybe even of immovable properties or expensive items, also there stands a possibility that these giftings are being done in order to evade taxes or utilize unaccounted incomes.

In event of any kind of suspicion about any accounting transaction or delivery of gift, the Income Tax Department may initiate assessment procedures, by appointing an assessing officer to access any discrepancy found in the Income Tax Return filed by a taxpayer. A taxpayer has to keep records of all supportive documents related to transactions he commits during a financial year. In most cases, the taxpayer ignores or forgets to report some essential transactions which if left undisclosed may attract severe penalties.

Filing Income Tax Return is a disclosure of income to the Income Tax Department, a taxpayer here is at an option to provide particulars of certain incomes not preferably asked by the department. While income above the exemption limit from different sources like incomes from salary, house property, income from a business , capital gains& income from other sources; requires a mandatory disclosure from the taxpayer.

Gifts received under Section 56 of the Income Tax Act, 1961 by the taxpayer from relatives up to a certain prescribed limit are tax-free in the hands of the recipient. There is always confusion among the taxpayers relating to reporting of gifts in their Income Tax Return.

Here you will get to know about the disclosure requirements of Income-tax rules for gifts in Income Tax Return.

Disclosure of Incomes in Income Tax Return

The Section 139 of Income Tax Act 1961 requires every taxpayer to report all his incomes received from different sources by furnishing a return of his income in the manner prescribed,  provided that the income should be exceeding the maximum amount not chargeable to Income Tax without having any effect to the provisions of Section 10 and deductions provided in Chapter VI-A.

In the provisions of Income Tax, there is no specific mention of the nondisclosure requirement of incomes exempted in the Income Tax Return. Thus, all transactions affecting the taxable income of the taxpayer have to be reported in the Income Tax Return.

Source of Gifts

Disclosure of gifts in income tax return depends upon the source /type of gifts received the involved amount and the tax rules applicable on such gift/contributions. Gifts in India can be received by a taxpayer from any of the following persons:

  • Gifts from Relative

Gifts received from a relative which can either be from brother or sister of the individual or of spouse, brother or sister of either parents, spouse, any lineal ascendant or descendent of the of individual or of spouse as per the provisions shall not be taxable in the hands of taxpayer also there is no such limit on the amount of money that can be received as a gift from relatives.

  • Gifts from Non-Relative

Gifts received from friends, other persons or institutions all are specified under gift receipts from non-relatives. As per current tax norms, gifts received from non-relatives in any form above Rs 50,000 in a year are taxable.

For a better understanding given example can be read

If a taxpayer received a gift of Rs.45,000/- on his/her birthday from a friend, the entire amount of Rs.45,000 will NOT be taxable under income tax.

On the other hand, if a taxpayer receives a gift of Rs.55,000/- on his/her birthday from a friend, the entire amount of Rs.55,000/- will become taxable under income tax provisions, as it exceeds the threshold.

The Income Tax Act further provides for tax free gifts received on certain occasions like marriage, death or inheritance and other than that any money received from a local authority or fund ,foundation , university other educational institution, hospital or other medical institution or any trust having 12A registration

As per this provision, money received by a meritorious student from a college or university or a patient under medical care is also exempt from income tax.

Disclosure of Gifts in Income Tax Return

Income Tax Department mandates every taxpayer to report all incomes taxable in hand of the taxpayer including exempted incomes affecting the taxable income of taxpayers. Filing an income tax return form, a taxpayer has to voluntarily declare gifts received during the financial year by:

  • Disclosing all taxable gifts received under the head “Income from Other Sources” in the Income Tax form.
  • Disclosing the exempted or non-taxable gifts under the Schedule EI – Exempted Incomes.

Why should there be disclosure of exempted incomes/gifts in the Income Tax Return?

Gifts are for the Income Tax nothing but income sources of a taxpayer which one should not ignore to disclose while filling income tax return. Not disclosing gifts is not a right approach, as the department can specifically ask for the details of accepted gifts. Tax authorities can re-assess or can issue directions for reassessment of the taxpayer, which can result in levy of a hefty penalty on the taxpayer. Non-disclosure of gifts will become a reason of suspicion and the taxpayer can be called for scrutiny or to justify the source of income/gifts received.

Conclusion:

The Income Tax rules require every taxable income and exempted incomes those affecting the taxable income to be mandatorily reported while Filing Income Tax return. But it is nowhere mandatory for a taxpayer to disclose non-taxable gifts received by him in his ITR. But the point is why to create a scrutiny situation when the income is exempted and can be easily disclosed without hassles.

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