Section 56(2) of the Income-Tax Act seeks to impose tax in the hands of recipient subject to certain conditions. According to the said provision, the receipt of property (which may be in any form – cash, jewellery, movable and immovable property, shares etc.) by any person without consideration, the fair market value of which is over Rs.50,000 shall be taxable in the hands of the recipient under the head “Income from other sources”.
However,this rule is not applicable if your relatives present the gift. So just to escape gift tax in India, you can’t call a person your relative. To avoid this, the income tax rules specify relatives from whom you can receive gifts without the Tax on gifts. These are:
- Your and your spouse’s brothers and sisters
- Brothers and sisters of your parents
- Your lineal descendants (including spouses)
- Lineal descendants (including spouses) of your spouse
Also, there is no tax on gifts received in marriages or as a result of inheritance. If a gift comes to you by will then you are not supposed to pay any gift tax on the amount. But, if the income is generated later say by way of rent on a house inherited by you would be taxable.
How to plan gift tax?
- If a husband gifts anything to his wife without adequate consideration then it is taxable in the hands of husband. The gift is clubbed with husband’s income. Similarly, any gift from wife to husband in the absence of adequate consideration is taxable in the hands of wife due to clubbing provisions.
- Gift Tax can be saved by gifting/transferring your investment in the name of any of your close family member who fall in nil or lower tax bracket.
- If you gift anything to your daughter-in-law without adequate consideration then any income derived by her out of the gifted amount/property will be clubbed in your hands.
While there is a specific exemption to tax on gifts received from specified relatives, ‘cousin’ does not fall within the definition of ‘relative’. Accordingly, gift received by you from your cousin shall be taxable in your hands.