Gift Tax on Property
Throughout our lives, we have received many gifts and we keep receiving them even today. Doesn’t that feel great? Afterall, who doesn’t like gifts? However, gifts can become nightmares. Sounds ugly, right? Can’t help! That’s law and trust us, no individual in this world is beyond this law. Gifts attract taxes and is true for every country. The only difference is that different countries have different set of rules when it comes to taxation on gifts. So, gift taxes in India will vary from gift taxes in the United Kingdom or in France or in Germany.
Since we are far more interested in India, let us try and focus on Indian laws. In this article, we will try and find out answers to some of the most disturbing questions we face. Our primary focus will be on property but before we get into those details, we need to get a clear understanding of a few concepts that are used in case of gift taxes in India.
The basic law
In India, if you are receiving any gift which is worth above INR 50,000, you will be considered as a person who is receiving additional income. In such a scenario, the amount above INR 50,000 becomes taxable under the 1961 Income Tax Act of India.
The gift can be in form of cash, any property that can be moved or any property that cannot be moved. It can also be in form of shares.
Because it is your income, you will have to pay the taxes. The giver or the person who is giving you the gift is not taxed. So, just for the sake of example, someone gives you an iPhone 6 worth INR 60K, you need to pay taxes for INR 10K. That’s super ugly, right?
Hold your horses
We know you have just heard the disturbing and disgusting thing for the day and we are to blame for making you upset but hey, there is something you need to know – something that can help you cheer a little bit. There are some exceptions to the law that we just mentioned above and we think you will find that a little comforting. So, here are some of those exceptions:
- You receive a gift from your relative – either a blood relative or a very close relative. Relatives include:
- Receiver’s spouse.
- Siblings of receiver’s spouse.
- Lineal descendant of receiver’s spouse.
- Lineal ascendant of receiver’s spouse.
- Parents of receiver.
- Siblings of receiver’s parents.
- Siblings of the receiver.
- Lineal descendant of receiver.
- Lineal ascendant of receiver.
- If you receive a gift than cannot be moved (like a land or a house) and the property is not located in your country of residence (i.e. India).
- You receive a gift on your wedding.
- You receive a gift from a WILL or by inheritance.
- A local authority (such as the state government) gives you a gift.
- Institutions for charity, education etc. and any other institution which is mentioned u/s 10(23) of Gift Tax law can give you a gift and you won’t have to pay taxes.
Considering property gifts
Now, property can be movable or immovable. For example, a house or a piece of land is immovable property. On the other hand, a car is movable property. The problem is that a property can be gifted. For example, a girl may receive a house as a gift during wedding. Similarly, a company can gift a house to a high-value employee. Will there be taxes? Let us find out!
We just studied above that when a gift comes from blood relative or a very close relative, there are absolutely no taxes. This means that if a girl receives a house as a gift on her wedding from her father, she (as a taxpayer) will not be subject to any taxation irrespective of the total value of the house. Whether the house costs INR 40 lakhs or less or whether it costs INR 2 crores or more, there won’t be any taxes at all.
This however is not the case in the second example we gave.
If a company decides to give a house as a gift to one of its very high-value employee for outstanding performance, the recipient of the gift (i.e. the employee) will be subject to taxes. There will be rules in such cases. Let us take a look at the rules that apply.
- FOR IMMOVABLE PROPERTY: The employee receives the gift without any consideration. This means that the employee is not legally bound to give anything in return of the gift he or she receives. In such a case, if stamp duty is above INR 50,000, the total value of the stamp duty will be charged as tax.
- FOR IMMOVABLE PROPERTY: The employee receives the gift against a consideration. That is, the employee needs to pay something (not necessarily currency notes). In this scenario, taxes will be applicable on the entire value of the property.
- FOR MOVABLE PROPERTY: A vehicle can be a movable property. Now, if the employee receives a movable property without consideration and the FMV (abbreviation used for Fair Market Value) of the property is greater than INR 50,000, tax will be applied on the FMV of the property.
- FOR MOVABLE PROPERTY: The alternative scenario is that the property is gifted by the donor against consideration. In such a case, the difference between FMV and the value of the consideration will be calculated first. In case the difference exceeds INR 50,000 then, tax will be imposed on the difference between FMV and consideration value. In case the difference falls below the INR 50,000 mark, there will be no taxes.
Okay, we agree that it is a bit confusing but that’s the way it works! Laws are always complicated and when it comes to gifts, there are no exceptions. So, the next time when you receive a gift that is valued above INR 50,000 and the donor is not your relative, make sure that you get hold of a tax expert and avoid troubles.