Tax exemption on gifts

Gift of assets became tax-free after the Gift Tax Act, 1958 was repealed from October 1, 1998. However, indiscriminate gift of assets between taxpayers probably prompted the lawmakers to plug the loophole by incorporating necessary provisions for taxing gifts as income.

A gift as such can never be an income and hence for administrative convenience, the deeming provisions were inserted for treating the gifts as income.

Not all gifts could be subjected to tax on deemed basis as income and that is why, gifts from relatives, gifts on the occasion of marriage of the individual, gifts under will or inheritance and those received in contemplation of death of the donor, are eligible for tax exemption.

Gift from relatives, regardless of the occasion, continues to be tax free and the term ‘relative' is defined exhaustively and specifically for this purpose which is wider than the term ‘relative' defined for other purposes in Section 2(41) of the Act. Even in respect of taxable gifts, monetary limit which originally was Rs 25,000 was enhanced to Rs 50,000 w.e.f. April 1, 2007. Where the value of gift exceeds the prescribed monetary limit, the entire gift value is chargeable to tax.

Gift in kind

As the taxpayers started the strategy of allocating assets between various persons as tax planning device, the lawmakers also have to counter the measures to mitigate the damage. In this process, gifts chargeable to tax when given in cash were widened and the gifts in kind also came into the tax net.

Presently, to cover non-cash items a single expression is used viz. property and it covers immovable property, shares and securities, jewellery, drawings, paintings, sculptures, bullion, any work of art and archaeological collections.

Gift received by a member from his own HUF whether taxable as income was debated in Vineetkumar Raghavjibhai Bhalodia v. ITO 46 SOT 97 (Rajkot). The taxpayer received a gift of Rs 60 lakh from the HUF and claimed tax exemption.

The tribunal held that HUF would mean descendants from common ancestor and each person of the HUF is individually covered by the term ‘relative' mentioned in Section 56(2)(vi) for the purpose of reckoning tax exemption. Thus, in spite of the law not addressing the issue exactly, it was held that gift from HUF to a member is eligible for tax exemption by interpreting the term ‘relative' as amongst the members of the family.

The other alternative available to the taxpayer is to take shelter under Section 10(2) of the Act which deals with any sum received by an individual out of the income of the family.

Capital gains tax

Transfer of immovable property between two persons for a lesser consideration exposes the transferor to capital gains tax by adopting stamp duty valuation as deemed sale consideration.

The Finance Act, 2009 resorted to covering the buyer by treating the difference between stamp duty valuation and apparent consideration as income. It was treated at par with gift by non-relative. The Finance Act, 2010 reversed the amendment brought in by Finance Act, 2009 by relieving the buyer from paying tax on such deemed income or deemed gift. This relief is subject to the transaction being a commercial transaction where the consideration is treated as inadequate and where the consideration is totally absent, this tax benefit could not be availed.

However, a taxpayer receiving an immovable property without any consideration had to pay tax on the value according to stamp duty valuation and subsequently if transfers the said property he can adopt the stamp duty value as his cost of acquisition.

This is equitable since tax was paid on stamp duty value earlier as income under the head ‘other sources'. However, a property without consideration though called as ‘gift' it would not fit into Section 49(1) in view of specific provision contained in Section 49(4) and the asset whether short term or long term is to be reckoned with reference to the date of receipt of gift by the taxpayer and the donor's holding period could not be considered. This is because explanation to Section 2(42A) covers Section 49(1) and not Section 49(4).

Since a specific provision i.e. Section 49(4) addresses the cost of acquisition of asset obtained by taxpayer by way of gift from non-relative and on which tax was paid under Section 56(2)(vii), the general meaning of ‘gift' contained in Section 49(1) will not apply.

(The author is an Erode-based chartered accountant.)

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