Gifting is often used to transfer property or money within the family or to relatives by way of will or inheritance. However, gift has also been used as a medium to evade taxes due to which the government had introduced the Gift Tax Act, 1958 (GTA) to curb tax evasion activities. GTA was later repealed and the incidence of tax was comprehensively incorporated in the Income-tax Act, 1961 (ITA) to ensure that bogus transactions are not carried out with the sole objective of tax avoidance.
As per the ITA, amount of money exceeding Rs 50,000 received without consideration is subject to tax as income from other sources in the hands of the recipient. Similarly, if an immovable property having stamp duty value in excess of Rs 50,000 or a movable property such as shares of a company or jewellery or work of art etc. having fair market value in excess of Rs 50,000 is received without consideration, the same is subject to tax in the hands of the recipient. Such income is taxable at applicable tax rates in the year of receipt. However, the ITA also specifies certain categories of transactions which are not covered under the ambit of taxation and it is very important for a recipient of the gift to ensure whether or not the gift received by him is subject to tax.
While a certain transaction may be genuine and free from tax incidence, given the value which may be involved, there is every chance that the tax authorities may question the validity of the transaction and ask for proof to substantiate that the same is not subject to tax.
For example, say you have received Rs 3 lakh in cash on your wedding by way of gift in aggregate from 300 guests and you decide to deposit the same into your bank account. As per the reporting norms, the bank may be required to report this cash deposit with the tax authorities. The tax authorities may question the source of cash receipt to ensure that this is not an undisclosed income which could have fetched tax revenue for the authorities.
Though the ITA specifically provides that any sum of money received on the occasion of marriage of an individual is not to be treated as his/her income, the question arises as to how will you justify that such cash was indeed received on the occasion of marriage. In such a case, it would be useful to maintain a digital or manual register of guests and note down the sum of money gifted by each. This can be used as a proof to justify to the tax authorities the genuineness of the cash deposit made by you in the bank.
Another such example is receipt of money from your relatives which is specifically excluded from the ambit of taxation. If your relative transfers a sum of Rs 10 lakh to your bank account, you may have to justify the source of the money to the tax authorities. It would be prudent to execute a gift deed which acts as documentary evidence for the receipt of gift by the recipient. When an immovable property is transferred as a gift, it is mandatory to execute a a gift deed which acts as documentary evidence for the receipt of gift by the recipient. When an immovable property is transferred as a gift, it is mandatory to execute a gift deed. The same mechanism can be adopted to substantiate receipt of money from the relative in the current example. Other documents such as your bank statement or copy of cheque received etc. may also be maintained.
Property or money received under a will or by way of inheritance is not subject to tax in the hands the recipient. If an immovable property is received under a will, the recipient should try to obtain original buyer's agreement of the property, details and back-up of sums paid to acquire the property by the original buyer (giver of gift) and a copy of the will which will act as proof in case any queries are raised by the tax authorities.
Given the increased scrutiny by the tax authorities, the giver and recipient of the gift should exercise due caution to safeguard themselves from any enquiry. While the documents to be maintained for each gift received would differ as per the nature of transaction, it is prudent to maintain appropriate records to justify the genuineness of the transaction.
(The writer is Tax Partner, People Advisory Services, EY India)
(Views expressed are personal)
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