Gift Tax: On a comeback trail!

Gifts were earlier taxable under the Gift Tax Act. This Act was subsequently scrapped and for the last few years, gifts were not subject to any tax.

Now, Gift Tax has now been brought back in a different form. It was introduced by The Finance Act (No.2), 2004; and has now been provided under sub-section (2) after clause (iv) of Section 56. Section 56 deals with 'Income from Other Sources.'

This new sub-section states that where any sum of money, exceeding Rs 25,000 is received without consideration by an individual or an HUF (Hindu Undivided Family) from any person, on or after September 1, 2004, the whole of such sum would be treated as 'Income from Other Sources.'

There are four exclusions to this sub-section, i.e. receipts under the following categories will not be treated as income:

From any relative.
On the occasion of the marriage of the individual.
Under a will or by way of inheritance.
In contemplation of death of the person paying.

Only the following individuals will be qualify as relatives:

i) Spouse of the individual.
ii) Brother or sister of the individual.
iii) Brother or sister of the spouse of the individual.
iv) Brother or sister of either of the parents of the individual.
v) Any lineal ascendant or descendant of the individual.
vi) Any lineal ascendant or descendant of the spouse of the individual.
vii) Spouse of the person referred to in clause (ii) to (iv).

Thus, any sum, exceeding Rs 25,000 received by an individual or an HUF, would be taxable as the recipient's income. This will be with effect from September 1, 2004. The payer can be any person i.e. individual, HUF, company, firm, AOP (association of persons), artificial judicial person, etc.

This Section refers to 'the sum of money,' a term that includes cash or kind, i.e. in monies worth. The words 'any sum of money' would mean that the sums, received by the recipient, would be aggregated.

This means that if Rs 25,000 is received from five donors, i.e. Rs 125,000 in total, then the first Rs 25,000 would not be taxable and the balance would be taxable.

This means that all Diwali gifts, birthday and anniversary presents, which exceed the aggregate of Rs 25,000, will now become taxable and you would be liable to pay tax on the same.

If you fail to provide for the same in your return of income and the same is detected by the income tax officer, then in addition to tax payable, you will be liable for penalty and prosecution.

This article forms a part of the latest issue of Money Simplified - The Definitive Guide to Tax Panning. Click here to download, for FREE, the complete guide.