The Hindu Business Line : A tax wrap-up of gifts

The Gift Tax Act, 1958 became inoperative in respect of gifts made on or after October 1, 1998. Since then, transfer of assets between persons has been tax-free.The Finance Minister, while presenting the 2004 Budget, introduced Section 56(2)(v) in the Income-Tax Act, 1961 for taxing cash gifts as income.

A gift of asset between persons is the outcome of long association or bonding. A gift in kind is currently spared from taxconsequences. The term ‘gift’ connotes transfer of money or money’s worth from one person to another. If the transaction is two-way then it amounts to exchange or barter and it cannot fit into the term ‘gift’.

Also, transfer of asset between persons by means of an agreement, arrangement or understanding relating to business, technical knowledge or information cannot be called gift, and Section 28(va) would specifically apply in such cases.

At present, gift in cash is subjected to tax by means of an artificial provision contained in the statute book. This write-up focuses on the provisions relating to gift of assets and the tax consequences.

Statutory provision

The definition of the term ‘income’ contained in Section 2(24) covers gifts referred to in Sections 56 (2)(v) and 56 (2)(vi) respectively.

Any sum of money exceeding Rs 50,000 in aggregate received without consideration by an individual or HUF is taxable as income under the head ‘other sources’. However, cash gifts received from the following are exempt from tax: a) any relative; b) any person on the occasion of marriage of the individual; c) any person by means of will or by way of inheritance; d) any person in contemplation of his death; e) a local authority as defined in the Explanation to Section 10(20); f) any institution or trust referred to in Section 10(23); and g) any trust registered under Section 12AA.

The Finance (No. 2) Act, 2004 prescribed the monetary limit at Rs 25,000 and clause (vi) to Section 56(2), brought in by the Taxation Laws (Amendment) Act, 2006, now puts the overall cap at Rs 50,000 w.e.f. April 1, 2007.

In the Finance (No. 2) Bill, 2004, the memorandum explaining the amendments stated that “any sum received on or after first day of September 2004 by an individual or a HUF from any person in cash or by way of credit, otherwise than by way of consideration of goods and services shall be included within the definition of income under Section 2(24) of the Income-Tax Act.”

However, when the Bill was passed, it was diluted with taxpayers having to admit only those gifts which exceeded Rs 25,000 as income liable for tax.

The recent change in the statutory provision provides completeness by use of the words “aggregate value of” gifts exceeding Rs 50,000 and the expression “the whole of the aggregate value of such sum” is used for taxing the total cash gift.

Extent of coverage

Consequent to repeal of the Gift Tax Act, 1958 and the constant use of gift as a method of splitting the income in the prevalent progressive tax system by the taxpayers, the lawmakers perhaps have thought that taxing the gift as ‘income’ similar to taxing cash credits (under Section 68) would be the right medicine to set right the malady.

For more than three decades, gift of assets to spouse and daughter-in-law has been discouraged by means of statutory provision in Sections 64(1)(iv) and (vi). Any transfer of asset to spouse and income arising therefrom is chargeable to tax in the hands of the transferor.

Similarly, transfer of asset to son’s wife is chargeable to tax in the hands of the transferor. These provisions virtually rule out transfer of assets and income accruing sources to spouse and daughter in law. However, because of the ingenious of the taxpayers still some leeway exists.

Consider, a case where Mr X gifts Rs 10 lakh to his wife and she makes a bank deposit and earns interest income of Rs 1 lakh at the end of the first year. This interest income is taxable in the hands of Mr X. Again, if such interest income is deployed in a business by Mrs X and she earns profit of Rs 2 lakh later, such profit earned (that is, Rs 2 lakh) out of the previously clubbed income is not liable for clubbing again.

Gift of cash

Section 56 (2)(vi) as is operational now is meant to tax only receipt of any sum of money without consideration. Where there is consideration then Section 56 (2)(vi) cannot be pressed into service. Also, gift in kind is not covered by Section 56 (2)(vi).

Gift in kind such as land, buildings, shares, securities, jewellery are not chargeable to tax irrespective of whether the donor and the donee have any pre-existing relationship between them. However, sham transactions could be probed by the tax department and the natural consequences such as penalty and prosecution are possible.

Exempted cash gifts

Cash gifts received from relatives is totally tax-free. Relative for this purpose includes a) spouse; b) brother or sister; c) brother or sister of the spouse of the individual; d) brother or sister of the parents of the individual; e) any lineal ascendant or descendant of the individual; f) any lineal ascendant or descendant of the spouse of the individual; and g) spouse of persons referred to in (b) to (f) referred above.

Cash gifts received on the occasion of marriage of the taxpayer is fully exempt from tax. Such cash gift irrespective of the quantum are free from tax.

Anonymous donations

Anonymous donations received by trust or institution referred to in Section 11 or Section 10(23C) is chargeable to tax at the flat rate of 30 per cent. The Finance Act, 2006 has inserted Section 115 BBC to tax anonymous donations without giving weightage to the end use of funds. This provision is similar to cash gifts chargeable to tax in the case of individual and HUF assessees.

Section 13A political parties to maintain the names and addresses of persons making voluntary contributions in excess of Rs 20,000. If the details are not maintained, then such contributions (being cash donations) will not be free from tax.