It’s your first wedding anniversary and your best friend gives you a cheque of Rs 60,000. He wants you to buy a plasma television you have always dreamt of owning.

But wait! Do you know what you are getting into? You will have to pay tax on the entire amount of Rs 60,000. Ask your friend to gift you the television instead. That way, none of you will have to pay a tax.

A person gifting more than Rs 50,000 has to pay a tax on the amount and the individual or the Hindu undivided family (HUF) receiving it has to include the amount as “income from other sources” in their returns and also pay tax on it.

Some exceptions

• The law allows you to give or receive gifts without paying any tax to/from:
• Any close relative
• On the occasion of the marriage of the individual
• A will or by way of inheritance
• In contemplation of death of the payer
• From any local authority such as municipality
• From any fund, foundation, university and other educational institution, hospital and other medical institution or any trust registered under section 10, such as the Prime Minister's National Relief Fund, non-profit educational institutions and charitable trusts.

Who’s a close relative

I) Spouse

II) Brother or sister

III) Brother or sister of spouse

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 his/her spouse

(VII) Spouse of the person referred to in (ii) to (vi)

One can give or receive any sum of money to or from close relatives without paying a gift tax. However, gifts from a non-relative, such as a friend, up to Rs 1 lakh is tax-free if received on the occasion of marriage.

On any other occasion, you can receive gifts from a non-relative up to Rs 50,000 in one financial year either in cash or by demand draft or cheque and for that you do not have to pay any income tax. But for any amount, even a rupee, in excess of Rs 50,000, you will have to pay tax on the entire sum.

Go for kind

Gifts received in kind are tax-free. You won’t have to pay any tax if your friend gifts you a television worth Rs 60,000 on your marriage anniversary.

However, you may have to satisfy the taxman about the financial status of the donor. Simply put, you may have to establish that the donor has enough income to gift you that money.

You may also need to establish a donor-donee relationship. Here’s how you do it: The donor (person who gives) writes an offer letter to the donee (person who receives); or the donee approaches the donor for a gift and, on receipt of the gift, the donee acknowledges the gift in writing.

Income from gift

Any income from the gifted asset to the spouse or minor children or son’s wife is taxed in the hands of the donor.

Let us assume you gift Rs 1 lakh to your wife who invests the money in a bank fixed deposit at an annual interest rate of 9 per cent. The annual interest income of Rs 9,000 from the deposit will be clubbed with your income and you will have to pay an income tax on it.

Go for Mutual funds

However, any secondary income from the interest amount of Rs 9,000 — supposing the money is invested in a recurring deposit — will be taxed at the hands of your wife.

So, while gifting a sum of money to your close relatives, make sure that the money is invested in instruments exempt under section 10 of the income tax act. Such income include dividend from mutual funds, capital gains, and interest income on specified government bonds and securities.

Hence, the best way to gift money to your near and dear ones is either to buy some company shares or units of mutual funds.

While the dividend income on shares and units of mutual funds are tax-free in the hands of the recipient, there is also no long term capital gains tax on equities.