Gift Tax Rules Decoded: Everything You Need to Know for ITR Filing

Receiving a gift of money or property from a loved one can be a significant financial event. While the Income Tax Act aims to prevent the misuse of "gifts" for tax evasion, it provides a crucial and welcome exemption for gifts received from specified relatives.

The Gift Exemption Under Section 56(2) (x)

Section 56(2)(x) of the Income Tax Act, 1961, is an anti-abuse provision designed to tax money or property received without consideration (or for inadequate consideration) that exceeds a certain limit. It taxes this receipt under the head "Income from Other Sources."

However, the law explicitly carves out several major exceptions, with the most significant being gifts received from a "Relative."

The cornerstone of gift taxation lies in Section 56(2)(x) of the Income Tax Act, 1961. This section generally stipulates that any sum of money or property received without consideration (i.e., as a gift) is taxable in the hands of the recipient if its value exceeds ₹50,000 in a financial year.

This means that a transfer of money, movable property (like shares or jewellery), or immovable property (like a house) received as a genuine gift from a specified relative is fully exempt from income tax, regardless of the value.

Who Qualifies as a "Relative"?

The definition of 'relative' for this exemption is specific and covers the immediate family circle. It includes:

• Spouse of the individual.
• Brother or sister of the individual.
• Brother or sister of the spouse of the individual.
• Brother or sister of either of the parents of the individual.
• Any lineal ascendant or descendant of the individual (e.g., parents, grandparents, children, grandchildren).
• Any lineal ascendant or descendant of the spouse of the individual.
• Spouse of any of the individuals mentioned above.

Example: A gift of ₹25 lakh received by an individual from their sister is fully exempt from income tax because a sister qualifies as a specified relative under Section 56(2)(x).

The Importance of Disclosure and Documentation

Even though the gift from a relative is exempt, you must remain vigilant to avoid potential scrutiny.

Aspect	Action/Recommendation	Rationale
ITR Disclosure	Mandatory to disclose in the ITR, typically under the Exempt Income schedule (or Schedule EI).	Ensures transparency and reconciles the high-value transaction with your tax profile, preventing a mismatch with your Annual Information Statement (AIS).
Documentation	Maintain a Gift Deed, bank statements (of both donor and recipient), and proof of the relationship (birth/marriage certificates).	If the high-value transaction triggers a notice, these documents prove the authenticity of the gift and the tax-exempt status, helping the recipient successfully address any queries.
Genuineness	Ensure the donor has the financial capacity to give the gift.	The Tax Department may question the creditworthiness of the donor to ensure the gift is not a way to launder the recipient's black money. Documenting the donor’s source of funds is key.

Disclosure is Key to Transparency

Even though a gift from a relative is exempt, it is strongly recommended that the recipient disclose the receipt in their Income Tax Return (ITR). This practice is crucial for maintaining transparency and preventing future tax queries:

1. ITR Disclosure: The amount should be reported in the "Exempt Income" schedule of the ITR form. This clearly informs the Income Tax Department that a large sum was received, but it is not being offered for tax as it falls under a statutory exemption.
2. Reconciling with AIS: High-value banking transactions, especially those involving significant cash transfers or remittances, are tracked and reported by financial institutions to the tax department. These will likely reflect in the recipient's Annual Information Statement (AIS). If the amount appears in the AIS but is not accounted for in the ITR, it may trigger an automated tax notice.
3. Documentation: Recipients should always retain supporting documentation for the gift, such as:
• A Gift Deed (formally executed and ideally notarized).
• Bank transfer records showing the flow of funds from the relative's account to the recipient's account.

By adhering to proper disclosure and documentation, taxpayers can successfully enjoy the benefits of this exemption without fear of scrutiny from the tax department.

·         Source: various articles / media news

Disclaimer: Every effort has been made to avoid errors or omissions in this material. In spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition. In no event the author shall be liable for any direct, indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information.