Wednesday, September 12, 2012

Gift Tax in India: Rules, Rates, Exclusion & Limit

Receiving gift in cash or kind can save you lot of taxes provided the gift is received from the permissible relative and within the annual limits. The main problems is faced by individuals when they look to receive or give gifts and is not being knowledgeable about when the gift would be taxable. 

By Definition "Any gift received in cash or kind exceeding Rs.50,000 is taxed in the hands of recipient under the head income from other sources. However gifts received from specified relatives are exempt from Income Tax, and there is no upper limit on the amount. 

Now the confusion is usually on the relative part. The term relative means following as far as gifts under income tax are concerned. A relative can be any of the following:

1. Spouse of the individual.
2. Brother or sister of the individual, spouse or of either parent.
3. Lineal ascendants or descendants of individual or of spouse.
4. Spouse of person referred to in scenario No.2  and No.3 above.

Now lets elaborate the relatives further. The first group of people who would qualify as a relative under the rules would be the brother and sister of the individual. This along with the term all lineal ascendants and descendants ensures that the immediate family members would be considered as a relative. This would mean the father as well as grandfather as well as children and grandchildren. This makes the process of giving easier when so many people would be present to be covered under the term of relative.

In terms of the further coverage the brothers and sisters of the parents of the individual are also covered so this will bring into the fold all the aunts and uncles that are present in the family. Often a lot of gifts are given from them and hence this is not a concern. The spouse of all the categories of people mentioned would also be included as a relative which means that the wife of the uncle or the husband of an aunt or grandmother who could have given a gift would not be covered under the provision of having their contributions considered as taxable.

An important person who is covered under the entire provisions of gifts is the spouse of the individual. So if it is a husband then it would include his wife and for a female it would include the husband. Taking this term further the brother and sister of the spouse of the individual would also be covered under the definition of a relative. Add to this the fact that the spouse of such people has also been brought into the coverage and this ensures that the coverage gets wider.

Any lineal ascendant or descendant of the spouse of the individual along with their spouses would also be covered plus their spouses so this would mean that parents of the spouse and even grandparents can give a gift to the individual and this would not be taxed. The list of details about the relatives is quite vast in terms of coverage so most of the close relatives of the individual are included and this is something that has to be  considered when there is a gift being received or given.

Now there are certain other instances when receiving gifts would be tax free in the hands of the receiver. If you receive a gift on any of the following occasions, that gift will be tax free in your hands.

1. On occasion of the marriage of the individual
2. Under a will or by way of inheritance
3. In contemplation of death of the payer
4. Any local authority, trust or university etc.

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