Although gift tax at one point was abolished, currently, you need to pay tax if the value of the gifts received exceeds Rs. 50,000 in a financial year. This applies to all kinds of gifts – cash, shares, jewellery, property, and other moveable or immovable assets.
However, these apply to only gifts received from non-relatives. There are also different rules if the gift was received for your wedding. Any amount of money that you might receive in the form of cash or cheque on the occasion of your marriage is fully exempt from tax. This comes with certain conditions though. Remember that the ‘occasion of marriage’ will include the day of the wedding and a day or two before and after.
Additional Reading: Don’t Let Your Finances Undo The Knots
The next question is, how are gifts taxed? Gifts will be added to your income and taxed according to your tax slab. Pretty straightforward, isn’t it?
Now, let’s tell you why the gift tax was abolished and how it came back.
In 1997, gift tax was abolished. So both the donor as well as the recipient did not have to pay any tax on the gifts received. Consequently people started misusing the vacuum left behind by scrapping of gift tax. There was a widespread transfer of insincere gifts from non-relatives. In order to fill this void, Section 56 (2)(v) of the Income Tax Act was passed in 2004.
We’ll tell you more about this, but first let us ask you a question. Do you need money but don’t want to ask friends to help in order to save tax? Want to help out your friend but are scared that you will be taxed heavily for helping him out? Don’t be afraid. There is good news for you. You will not be taxed at all.
In a ruling by ITAT in the case of Mr. Chandrakant Shah stated that if you borrow interest-free money from friends and colleagues neither you nor the lender will have to pay tax. This ruling was given by the tribunal on 12thJanuary 2009. Let us take a look at how this ruling came into effect.
Prior to 1997, one of the taxes that existed was Gift Tax. As per the rules of the Gift Tax Act, the person lending the money to his acquaintances was taxed. And the tax rate here was exorbitantly high. You ended up paying around 30% of the value of the taxable gift. For example, if the value of the gift was Rs 1 lakh, you ended up paying Rs 30,000 to the income tax department. This made many people wary of lending money to their friends and colleagues.
Even the recipients of such gifts were not spared. As a result, many people did not use this good source of financing, even though their friends did not charge them any interest.
Additional Reading: Gifting Ideas: A Single ULIP Over A Bouquet Of Tulips
However in 1997, gift tax was abolished. So, both the donor as well as the recipient did not have to pay any tax on the gifts received. Consequently people started misusing the vacuum left behind by scrapping of gift tax. There was a widespread transfer of insincere gifts from non-relatives. In order to fill up this void, Section 56 (2)(v) of Income Tax Act was passed in 2004.
As per Section 56 (2)(v) of the Income Tax Act , any amount exceeding Rs 25,000 obtained by a person or a Hindu Undivided Family (HUF) without any consideration from a non-relative would be taxed. The only cases exempted were the gifts given at the time of marriage, inheritance left behind in a will, or if the payer has died.
In case of Mr. Chandrakant Shah, the assessing officer of income tax, used this section and considered the interest-free loans given to Mr Shah by his non-relatives as amount without consideration and taxed it. This made Mr. Shah approach Commissioner of IT (Appeals) for relief, but failed. Subsequently he appealed the Mumbai ITAT, and his lawyer argued that the lower authorities made the wrong interpretation of this section. Moreover his lawyer argued that an interest-free loan does not fall within the purview of Section 56 (2)(v), since the loan repayment itself can be regarded as consideration between both the parties and not as an amount without consideration. Also Mr. Shah’s balance sheet showed the amount as unsecured loan liability and so cannot be regarded as an addendum to the capital, which is true in case of gifts.
He also referred to the judgment given by the Court of Appeal of the State of California, which stated that a loan was a contract between two parties. As per this contract, one party lent money to other party, who then agreed to repay the money in the future, with or without interest. His argument was upheld by the ITAT bench and so gave the ruling favouring Mr. Shah.
So, the next time you are wondering whether to borrow the money from your friends and colleagues, go ahead and use this ruling to your benefit. There is no way you will be taxed.
Your friends and relatives unwilling to give you a loan? Don’t lose hope.
it's really required….
Do we need to submit any document to show if we borrowed the money or lending it to somebody?
What is the limit of monetory gift from father to his sons and grand daughters and its exemption from Income tax on capital gains
No monetary limits for gifts given to relatives during a year. The definition of relative includes father-son and grandfather-grandson/granddaugher. A person can give gift of any amount to any number of his relatives.
In 2003, i applied for VRS and got an X amount as VRS benefit. However, the benefit amount was given to me, the VRS optee , after the tax amount on the consideration was deducted. I was not employed any time after that in India. Years later I came to know that I could have claimed pro rata tax refund every year on the total tax paid on the VRS amount received in 2003. Is there any way, I can claim the tax refund now. I am working overseas for the last five years since Febuary 2005.
Very good post. Looking forward to the next one.
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Very Good article and useful also.
Please give full citation of the mentioned Tribunal authority and please also provide latest authority if any on this issue.
Hi K.K. JAIN,
As of now, you have to tax on gifts received if the value of the gift exceeds Rs. 50,000 a year.
How do I get the tax exemption (is there an option in the IT Return form to claim? ) for the money I gifted to my family members or friends?
There are no tax exemptions for gifts given to your relatives. If the amount of gifts from non-relatives exceed Rs. 50,000, your family members might have to pay gift tax as per their tax slab.