A gift for someone you love, went a popular ad for chocolates. And that's what most gifts are: tokens of love, admiration, respect or appreciation. But the taxman sings a different song. "What's love got to do with it?" he asks. That's because many unscrupulous people use 'gifts as a mode of money laundering or tax evasion.'
Till October 1998, the Gift Tax Act taxed donors. But the Act was abolished in 1998, and till September 2004, there was no provision in the Income Tax Act to levy tax on gifts. This seems logical, since giving or receiving gifts cannot be considered income; it is in the nature of capital receipt and income tax can only be levied on 'income receipts.'
But to prevent the practice of giving gifts to launder money or evade tax, Section 68 was included in the I-T Act. It lays down that unexplained cash credits in the books of the assessee will be taxed.
Dealing with money laundering: As the provisions of Section 68 were considered too weak to deal with bogus capital building and money laundering, the definition of income and coverage of 'Income from other sources was amended in Finance (No. 2) Act, 2004.'
Under this amendment, which came into effect from 1 April 2005 (assessment year 2005-06), the definition of income under Section 2(24) and scope of 'Income from other sources under Section 56 were expanded to cover receipts exceeding Rs 25,000 without consideration by an individual or HUF from any person on or after 1 September 2004.'
It is not fair to tax medical help from philanthropists and gifts received from friends on birthdays
Taxation law for gifts: This law was further amended in the Taxation Laws (Amendment) Act, 2006, with effect from financial year 2006-07 (assessment year 2007-08). What is now taxable is the aggregate value of any sum of money which exceeds Rs 50,000 and which is received without consideration by an individual or HUF from any person or persons.
Any gift of money of more than Rs 50,000 will be taxed. And before you think you can get away with giving/receiving hugely expensive gifts, the I-T Act taxes unproved gifts as income. Also, since the recipient should be an individual (resident or non-resident) or HUF, gifts to a company will fall outside the net. Unlike the earlier Gift Tax Act, which taxed the donor, the new law places the tax burden on the recipient.
Interpreting the law: If the aggregate amount of receipt exceeds the threshold limit of Rs 50,000, the whole aggregate receipt is taxable, not merely the amount in excess of Rs 50,000. There is some confusion whether the limit of Rs 50,000 applies to individual gifts or to the aggregate amount of gifts in a year or to gifts received from a particular donor in a year.
The majority view is that it applies to aggregate amount of gifts received during a year. So, if the total amount of gifts received during a year amounts to, say, Rs 46,000, the assessee will not be taxed. However, if the aggregate is even Rs 51,000, the entire amount will be taxed.
The gift is not taxed at a flat rate but is added to the total income like regular salary or interest income and then the slab rate is applied on the aggregate. For instance, if an individual gets interest income of Rs 90,000 and receives a gift of Rs 60,000, his total income becomes Rs 150,000, and he will have to pay tax at 10.2 per cent (inclusive of education cess) on Rs 50,000 (the amount thats over the threshold limit of Rs 100,000).
Gifts to a minor: The income of a minor is included in the income of his parents, so any gift received by a minor child will be clubbed with his parents income. However, it is not clear whether the threshold of Rs 50,000 will be applied separately to a minor and his parents or if it will be applied to them together.
For instance, if a minor receives a gift of Rs 30,000 and his parent receives Rs 25,000, can they avoid paying tax since neither gift is above Rs 50,000? Or, since the aggregate is Rs 55,000, will the parent have to pay tax? An informed view suggests that the threshold should be applied separately to a minor and his parents, but this is not clear yet.
The exceptions: There are a few gifts that will not be taxed. These include gifts from relatives, which include the recipients spouse, brother or sister (and spouse of brother or sister), spouses brother or sister (and their spouses), parents brother or sister (and their spouses), any lineal ascendant or descendant, and any lineal ascendant or descendant of the spouse of the individual.
In my view, lineal ascendant or descendant covers relatives not only from the male side but also from the female side. Gifts received on the occasion of the recipients marriage will not be taxed, nor will be death-bed gifts and gifts received under a will or by way of inheritance.
Apart from the above, the Taxation Laws (Amendment) Act, 2006, also lays down that gifts from any of the following will not be taxed: local authority, fund, foundation, university, educational institution, hospital or other medical institution, and trust or institution referred to in Section 10 (23C) or registered under Section 12AA.
The general feeling is that the exceptions are not sufficient and leave out a number of genuine instances where there is no intention of money laundering or tax evasion while giving gifts.
For instance, gifts received from friends or from relatives like children of parents brother or sister, or those received on birthdays and anniversaries or for meritorious academic or sporting performances, medical assistance received from philanthropists, gratuitous compensation received from the central or state government during natural calamities or mishaps, and many more.
It is not fair to tax such receipts. The present provision of taxing gifts seems unduly harsh and needs to be radically amended or toned down so that legitimate recipients are not taxed.
The author is a member of the Bombay Chartered Accountants Society.
