Gift tax has been abolished but the confusion among people persists. Queries keep pouring in about the relationship between the receipt of gifts and the consequent tax liability. Let us try to clear these doubts by discussing the various aspects related to the burden on the recipients of gifts.

A person making a gift — either to a relative or a non-relative or a charitable or a religious institution — is exempt from paying any income tax, irrespective of the amount.

Further, a person receiving a gift, whether in cash or in kind, is not subject to any tax if the gifts are from blood relatives. According to Section 56 of Income Tax Act, 1961, the word “relative” means

(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 (ii) to (vi)

Hence, an individual receiving a gift worth any amount, movable or immovable, from relatives does not have to worry about paying tax on the gift.

However, Section 56 also says that if you receive gifts from non-relatives, such as friends, worth more than Rs 50,000 during a financial year, you have to pay tax on the amount which is in excess of Rs 50,000.

Suppose Sandip has received an amount of Rs 1,20,000 as gift from various friends on his 40th birthday. While Rs 50,000 will be exempt, the balance Rs 70,000 will be added to his income and subject to tax.

If Sandip receives, say Rs 5 lakh, from his father, he will not be required to pay any income tax because he has got it from a relative.

It’s complicated

Though you can receive gifts from relatives worth any amount without having to pay tax, it’s a bit complicated for a married woman receiving gifts from her husband, father-in-law or mother-in-law.

While there will be no tax liability on a married woman for receiving gifts from the husband, the father-in-law or the mother-in-law as they are her relatives by definition, a close screening of the income tax act shows that income from such gifted amount will be treated as the income of the donor.

Thus, the tax law clubs the income received by a married woman from these gifts with the income of the husband, the mother-in-law or the father-in-law.

Let’s take the example of Madhu who receives an amount of Rs 10 lakh from her husband, Rs 5 lakh from her father-in-law and another Rs 4 lakh from her mother-in-law. Madhu will not be subjected to tax for the entire amount of Rs 19 lakh received by her as they are from her relatives.

However, if Madhu receives, say Rs 10 lakh, from her husband and earns Rs 90,000 as interest by investing the money in bank fixed deposits, this earning will be added to the income of the husband under Section 64 and the latter will have to pay the income tax.

So, while Section 56 exempts individuals from tax for receiving gifts from blood relations, Section 64 acts as a hurdle for a married woman receiving money as gift from relatives as close as the husband, the father-in-law or the mother-in-law.

Alternative plan

A woman should avoid receiving gifts from the husband, the father-in-law or the mother-in-law. An alternative is to receive loan from them at a reasonable rate of interest. In such a case, the clubbing of income will not arise as the amount received is a loan and not a gift.

So, if a lady takes a loan from a husband, invests the money in a property, puts the property on rent, pays a reasonable interest to the husband, it will not attract the clubbing provision.

It may be noted that a married woman may receive any amount of gift from her own father, mother, brother, grandfather and other relatives. Neither will she have to pay tax nor will the clubbing provision apply here.

So, be very careful whenever you accept gifts from friends or relatives. While for non-relatives you have to ensure that the gifted amount does not exceed Rs 50,000, the provision of clubbing of income should be kept in mind for married woman.

The author is New Delhi based tax and investment consultant and can be reached at slakhotia@satyam.net.in