Tax exemption on giftsV.K.Subramani Share · print · T+ V.K.Subramani
Gift of assets became tax-free after the Gift Tax Act, 1958 was
repealed from October 1, 1998. However, indiscriminate gift of assets
between taxpayers probably prompted the lawmakers to plug the loophole
by incorporating necessary provisions for taxing gifts as income.
A gift as such can never be an income and hence for administrative
convenience, the deeming provisions were inserted for treating the
gifts as income.
Not all gifts could be subjected to tax on deemed basis as income and
that is why, gifts from relatives, gifts on the occasion of marriage
of the individual, gifts under will or inheritance and those received
in contemplation of death of the donor, are eligible for tax
exemption.
Gift from relatives, regardless of the occasion, continues to be tax
free and the term ‘relative' is defined exhaustively and specifically
for this purpose which is wider than the term ‘relative' defined for
other purposes in Section 2(41) of the Act. Even in respect of taxable
gifts, monetary limit which originally was Rs 25,000 was enhanced to
Rs 50,000 w.e.f. April 1, 2007. Where the value of gift exceeds the
prescribed monetary limit, the entire gift value is chargeable to tax.
Gift in kind
As the taxpayers started the strategy of allocating assets between
various persons as tax planning device, the lawmakers also have to
counter the measures to mitigate the damage. In this process, gifts
chargeable to tax when given in cash were widened and the gifts in
kind also came into the tax net.
Presently, to cover non-cash items a single expression is used viz.
property and it covers immovable property, shares and securities,
jewellery, drawings, paintings, sculptures, bullion, any work of art
and archaeological collections.
Gift received by a member from his own HUF whether taxable as income
was debated in Vineetkumar Raghavjibhai Bhalodia v. ITO 46 SOT 97
(Rajkot). The taxpayer received a gift of Rs 60 lakh from the HUF and
claimed tax exemption.
The tribunal held that HUF would mean descendants from common ancestor
and each person of the HUF is individually covered by the term
‘relative' mentioned in Section 56(2)(vi) for the purpose of reckoning
tax exemption. Thus, in spite of the law not addressing the issue
exactly, it was held that gift from HUF to a member is eligible for
tax exemption by interpreting the term ‘relative' as amongst the
members of the family.
The other alternative available to the taxpayer is to take shelter
under Section 10(2) of the Act which deals with any sum received by an
individual out of the income of the family.
Capital gains tax
Transfer of immovable property between two persons for a lesser
consideration exposes the transferor to capital gains tax by adopting
stamp duty valuation as deemed sale consideration.
The Finance Act, 2009 resorted to covering the buyer by treating the
difference between stamp duty valuation and apparent consideration as
income. It was treated at par with gift by non-relative. The Finance
Act, 2010 reversed the amendment brought in by Finance Act, 2009 by
relieving the buyer from paying tax on such deemed income or deemed
gift. This relief is subject to the transaction being a commercial
transaction where the consideration is treated as inadequate and where
the consideration is totally absent, this tax benefit could not be
availed.
However, a taxpayer receiving an immovable property without any
consideration had to pay tax on the value according to stamp duty
valuation and subsequently if transfers the said property he can adopt
the stamp duty value as his cost of acquisition.
This is equitable since tax was paid on stamp duty value earlier as
income under the head ‘other sources'. However, a property without
consideration though called as ‘gift' it would not fit into Section
49(1) in view of specific provision contained in Section 49(4) and the
asset whether short term or long term is to be reckoned with reference
to the date of receipt of gift by the taxpayer and the donor's holding
period could not be considered. This is because explanation to Section
2(42A) covers Section 49(1) and not Section 49(4).
Since a specific provision i.e. Section 49(4) addresses the cost of
acquisition of asset obtained by taxpayer by way of gift from
non-relative and on which tax was paid under Section 56(2)(vii), the
general meaning of ‘gift' contained in Section 49(1) will not apply.
--------------------------------------------------------------------------------
Under the Gift Tax Act, each member of a Hindu Undivided family is
individually covered by the term ‘relative' for the purpose of
reckoning tax exemption.
--------------------------------------------------------------------------------
(This article was published in the Business Line print edition dated
December 26, 2011
--
Gift of assets became tax-free after the Gift Tax Act, 1958 was
repealed from October 1, 1998. However, indiscriminate gift of assets
between taxpayers probably prompted the lawmakers to plug the loophole
by incorporating necessary provisions for taxing gifts as income.
A gift as such can never be an income and hence for administrative
convenience, the deeming provisions were inserted for treating the
gifts as income.
Not all gifts could be subjected to tax on deemed basis as income and
that is why, gifts from relatives, gifts on the occasion of marriage
of the individual, gifts under will or inheritance and those received
in contemplation of death of the donor, are eligible for tax
exemption.
Gift from relatives, regardless of the occasion, continues to be tax
free and the term ‘relative' is defined exhaustively and specifically
for this purpose which is wider than the term ‘relative' defined for
other purposes in Section 2(41) of the Act. Even in respect of taxable
gifts, monetary limit which originally was Rs 25,000 was enhanced to
Rs 50,000 w.e.f. April 1, 2007. Where the value of gift exceeds the
prescribed monetary limit, the entire gift value is chargeable to tax.
Gift in kind
As the taxpayers started the strategy of allocating assets between
various persons as tax planning device, the lawmakers also have to
counter the measures to mitigate the damage. In this process, gifts
chargeable to tax when given in cash were widened and the gifts in
kind also came into the tax net.
Presently, to cover non-cash items a single expression is used viz.
property and it covers immovable property, shares and securities,
jewellery, drawings, paintings, sculptures, bullion, any work of art
and archaeological collections.
Gift received by a member from his own HUF whether taxable as income
was debated in Vineetkumar Raghavjibhai Bhalodia v. ITO 46 SOT 97
(Rajkot). The taxpayer received a gift of Rs 60 lakh from the HUF and
claimed tax exemption.
The tribunal held that HUF would mean descendants from common ancestor
and each person of the HUF is individually covered by the term
‘relative' mentioned in Section 56(2)(vi) for the purpose of reckoning
tax exemption. Thus, in spite of the law not addressing the issue
exactly, it was held that gift from HUF to a member is eligible for
tax exemption by interpreting the term ‘relative' as amongst the
members of the family.
The other alternative available to the taxpayer is to take shelter
under Section 10(2) of the Act which deals with any sum received by an
individual out of the income of the family.
Capital gains tax
Transfer of immovable property between two persons for a lesser
consideration exposes the transferor to capital gains tax by adopting
stamp duty valuation as deemed sale consideration.
The Finance Act, 2009 resorted to covering the buyer by treating the
difference between stamp duty valuation and apparent consideration as
income. It was treated at par with gift by non-relative. The Finance
Act, 2010 reversed the amendment brought in by Finance Act, 2009 by
relieving the buyer from paying tax on such deemed income or deemed
gift. This relief is subject to the transaction being a commercial
transaction where the consideration is treated as inadequate and where
the consideration is totally absent, this tax benefit could not be
availed.
However, a taxpayer receiving an immovable property without any
consideration had to pay tax on the value according to stamp duty
valuation and subsequently if transfers the said property he can adopt
the stamp duty value as his cost of acquisition.
This is equitable since tax was paid on stamp duty value earlier as
income under the head ‘other sources'. However, a property without
consideration though called as ‘gift' it would not fit into Section
49(1) in view of specific provision contained in Section 49(4) and the
asset whether short term or long term is to be reckoned with reference
to the date of receipt of gift by the taxpayer and the donor's holding
period could not be considered. This is because explanation to Section
2(42A) covers Section 49(1) and not Section 49(4).
Since a specific provision i.e. Section 49(4) addresses the cost of
acquisition of asset obtained by taxpayer by way of gift from
non-relative and on which tax was paid under Section 56(2)(vii), the
general meaning of ‘gift' contained in Section 49(1) will not apply.
--------------------------------------------------------------------------------
Under the Gift Tax Act, each member of a Hindu Undivided family is
individually covered by the term ‘relative' for the purpose of
reckoning tax exemption.
--------------------------------------------------------------------------------
(This article was published in the Business Line print edition dated
December 26, 2011
--
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