Gift Tax in India: Rules, Exemptions, and How It Works

The Gift Tax in India, a rather complicated and not-so-well-understood area of Indian taxation law, has been in force since 1958. It was a separate tax eliminated in 1998 and brought back in 2004 under the heading ‘income from other sources’.

This reintroduction has been done in light of continued government action to stop the misuse of such gifts for money laundering or tax evasion. It is essential to comprehend the rules of gift tax, exemption rules, and how the entire mechanism works in India because the gift tax falls under the taxation system, directly affecting recipients’ taxable income.

The following overview examines the concept of gift tax in India to explain its current state and its impact on taxpayers.

What is an NRI Gift Deed?

Gift Deeds, specifically those relating to NRIs, are integral to India’s tax system. This concept originated from the larger area of Gift Tax, which the Indian government initiated in April 1958 under the Gift Tax Act (GTA). Gifts are now taxed under the Income Tax Act of 1961.

The NRI Gift Deed is required under Section 17 of the Registration Act of 1908, where an NRI intends to provide a gift to someone in India. This legal document helps the NRI follow Indian laws and regulations while transferring the title of the assets or property to the beneficiary.

Taxation of Gifts by Resident Indians to NRIs

The taxation of gifts from resident Indians to Non-Resident Indians (NRIs) is a particular case in the Indian taxation system. The essence of this taxation is not in the recipient’s place but in the gift’s origins. In the Indian tax regime for NRIs, the income tax laws focus primarily on the income received or earned in India or deemed to have been received or earned in India.

Taxation of Gifts from NRIs to Resident Indians

Gift giving by NRIs to Indian residents is governed by a structure that considers family and fiscal relationships. If gifts are provided from NRIs to their kin with residence in India, then such transfers are entirely excluded from tax for each party. This policy respects the culture that defined gift-giving within most Indian families before integrating Western culture.

NRI gifts to non-relatives in India are taxed if they exceed ₹50,000. The recipient of the gift is required to pay tax on the amount that exceeds this threshold.

Read Also: What is the Difference Between NRI, OCI & PIO?

Limits and Restrictions on Gifts

• The personal care exemptions include cash gifts with a yearly exemption of Rs. 50,000. Up to this limit, any amount received in a financial year remains tax-free, making it a reasonable threshold for money gifts.
• Any type of gift from family members is given special consideration. No matter the cost, you do not have to pay any tax amount on gifts received from parents, spouses, siblings, and in-laws.

• Spouses’ gifts occupy a peculiar position in tax law. With the concept of large dowries, in which the bride might be given jewellery or other property, the law states that no gift given during marriage shall be subject to taxation, no matter its value.

• Even though inheritances and bequests through wills are not considered gifts in the normal context, they are treated that way as far as taxation is concerned. Regardless of the amount, any such transfers are free from gift tax.

Types of Assets That Can Be Gifted

Gifting is a broad concept beyond mere cash payments. This flexibility allows the giver to give beneficial gifts depending on the giver’s goal and the benefits that the receiver may gain as per the law.

• Monetary gifts are among the most preferred and effective as they allow one to spend immediately. It is appropriate to keep records of any cash gifts and substantial sums so that there are no misunderstandings in the future.

• Gifts in the form of investments, such as shares, bonds, ETFs, mutual bonds, fixed deposits, etc., can help generate income in the future. It is critical to understand the concept of cost-basis transfer whenever you are gifting securities.

• Real estate gifts have a high potential value and involve significant tax consequences and legal issues. Donating land or buildings also involves some form of planning; in most cases, it is suggested to consult a professional.

• Tangible personal property items like paintings, jewellery, and collectables can be sentimental and have cash value. Therefore, it is essential to provide the fair value of these items for tax purposes.

• Gift cards work equally in choice and specificity, making them suitable for most situations.

Read Also: What are the Tax Benefits on Under Construction Properties?

Understanding Tax Liabilities on Gifts

In India, gift tax was reintroduced in 2004 through the Income Tax Act 1961, particularly Section 56(2)(x). This section relates to provisions of taxes on gifts received by an individual or a Hindu Undivided Family. The first principle is that where a gift exceeds a specified amount, it will be regarded as ‘Income from Other Sources’.

Here’s a brief overview of the key aspects:

• Monetary Threshold: Gifts that do not exceed ₹ 50,000 in total in a financial year are non-taxable.
• Relationship-based Exemptions: Anyone who receives gifts from specifically related persons is exempted from tax regardless of the amount.
• Occasion-based Exemptions: According to customs, gifts that people accept on special occasions, such as marriage events, are exempt from tax.
• Type of Gift: It contains provisions concerning gifts, namely cash gifts, immovable property, and gifts of certain movable property.

NRI Gift Tax Rules in India

India has undergone major transitions regarding NRI Gift Tax Rules after abolishing the Gift Tax Act 1998. Key points for NRI gift transactions are:

• Gifts to NRIs should be processed through the banking system to guarantee compliance with foreign exchange restrictions.
• Gifts other than shares are allowed up to a certain prescribed amount without seeking the prior approval of the RBI.
• All transfers must be documented, and where there are more significant gifts, then gift deeds should be prepared to formalise the transfer.
• The source of the funds used to purchase the gift must be sufficiently obvious and beyond reproach.

Who are Considered Relatives for the Purposes of Income Tax?

The concept of ‘relatives’ in the framework of Indian Income Tax laws becomes essential to evaluate the taxable outcome of gifts. The Income Tax Act enacted in 1961 lays down a clear list of relatives for tax exemption of genuine family gifts.

• Spouse
• Brothers and sisters
• Spouse’s siblings
• Siblings of either parent
• Any lineal ascendant or descendant
• Any lineal ascendant or descendant of the spouse
• Spouses of the above-mentioned individuals

Sorting out the complexities of the taxation of gifts in India is essential for transactions linked to the NRIs. By following these regulations, an individual can ensure that all his/her charitable deeds do not violate Indian tax laws and FEMA regulations.

If you are thinking of gifting residential property to your NRI friend, do get in touch with our experts at Rustomjee. With our range of property management services and finance teams, we ensure that the entire process of acquiring a property, and perhaps gifting it, stays seamless for our NRI clients.

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