A few months ago, Mumbai-based Sunil Ullal was thrilled when a friend gifted him a valuable painting. However, he was in for a surprise when his chartered accountant told him that he would have to pay tax on it. "The painting is by a renowned artist and its current value is about Rs 1 lakh. My friend gifted it to me when he realised I liked it, but I had no idea that I would have to pay for it, even if it was in the form of tax," says the 63-year-old.
According to the Income Tax Act (as well as the Direct Taxes Code, which is likely to come into effect from 1 April 2012), if you receive a gift whose value exceeds Rs 50,000, it will be clubbed with your income and you will have to pay tax on it. This rule is also applicable if the combined value of all the gifts received by you during a financial year exceeds the limit. Says Anand Tibrewala, senior partner at Mumbai-based AD & Co Chartered Accountants: "If the total value of your gifts exceeds Rs 50,000, you have to pay tax on the entire amount, not simply on the difference."
Says Manish Thakkar, director of Mumbai-based Thakkar Consultants: "This rule applies even in cases where you have bought a product from someone at a much lower price than its fair value." For instance, if the depreciated value of a car is Rs 4.5 lakh, but you buy it for Rs 3 lakh, the balance Rs 1.5 lakh will be considered as a gift and clubbed with your income.
However, if you pay Rs 4.1 lakh, you will not have to pay tax as the value of the gift (or the balance amount) is less than Rs 50,000. The fair market value of a gift is the price that it would fetch if it is sold in the open market on that particular date as determined by a registered valuer. For real estate, the stamp duty value will be considered as the market value.
Gifts given by specified relatives are exempt from tax, regardless of their value. Such relatives include spouse, siblings, brothers or sisters of spouse/parents, grandparents and grandchildren as well as their spouses.
Also, if a property is bequeathed to you under a Will, given on the occasion of your marriage or gifted by a local institution/authority, you won't be taxed.
Says Homi Mistry, partner, Deloitte Haskins and Sells: "A gift given in contemplation of death by the donor will also be exempt. If a person knows that he is going to die in a few days and gifts his assets to a person, the recipient is exempt from paying tax."
However, if you receive an expensive gift during an engagement, anniversary or birthday party, it will be taxed.
Under Section 56 of the Income Tax act, the value of the gift is clubbed with your total income and taxed according to your tax slab.
For example, if you receive a gift worth Rs 10 lakh in a financial year, it will be clubbed with your income. As this amount will put you in the highest income bracket, you will have to pay a 30% tax, plus surcharge, on your total income.
In case you earn an income from the gift, it will be taxable under the heading 'Income from other sources'. For instance, if you get rental income from a house that has been gifted to you, this will be taxed. A gift given to your minor child or income from that gift will be clubbed with your income.
Suppose, you have gifted a house or shares to your minor child (or spouse), it will be tax-exempt. However, the rental income or dividend earned will be clubbed with your income and taxed accordingly. But if you give such assets to your parents, who have no source of income, the income earned from it will be considered as their income. This can help you reduce your tax liability.
If you have received real estate as a gift, it is advisable to get a gift deed signed by the donor or get the property registered with the registrar. This will help you avoid legal hassles in the future. However, you should be careful as a gift deed, once signed, cannot be revoked. In case you are gifting real estate, you can add a condition/clause stating that if the recipient dies within your lifetime and does not have any descendants, the property should return to you. Property cannot be gifted to a foreign national though you can gift residential or commercial property to an NRI. However, you cannot give him agricultural/plantation land.
"You need to be careful about assessing the gifts you have received in a year while filing your income-tax return. If you fail to do so, not only will you have to pay the interest liability on your outstanding payments, but could also end up paying a fine that is one to three times the amount of tax you were supposed to pay," says Tibrewala.