Law on Taxability of Gifts under the Income Tax Provisions

Generally, gifts received are not regarded as Income chargeable to Tax. However, by virtue of section 2(24)(xiii) r.w.s. 56(2)(v)  after 1-9-2004, any sum of money exceeding Rs. 25,000 (Rs. 50,000 in respect of gifts received in or after 1.4.2006), received without consideration by an individual or an HUF from any person is chargeable to tax as Income under the head Other Sources, subject to following exceptions: [(a) Receipts from certain relatives; as defined in the section]. (Refer Chart) [(b) Receipts on occasion of marriage of the individual.] [(c) Receipts under a will or inheritance.] [(d) Receipts in contemplation of death of the payer.]

Sec. 56(2)(v) has been amended by the Taxation Laws (Amendment) Act, 2006 so as to exempt also the receipts from (i) local authority, (ii) institutions exempt u/s. 10(23C); and (iii) trusts/institutions registered u/s. 12AA.

Sec. 56(2) has been further amended and w.e.f. 1-10-2009, the scope of gift is increased by adding immovable property or any property besides sum of money [S. 56(2)(vii)] excluding stock-in-trade, raw material, consumable stores or any other trading assets as under :

List of Property –

i) immovable property being land or building or both ;

ii) shares and securities ;

iii) jewellery ;

iv) archaeological collections ;

v) drawings ;

vi) paintings ;

vii) sculptures ;

viii) any work of art ;

Valuation of Gift in case of

(i) Immovable Property

(a) without consideration – if stamp duty value exceeds Rs. 50,000/-, stamp duty value

(b) for a consideration which is less than stamp duty value – Provision not applicable

(ii) Any other property:

(a) without consideration – fair market value exceeds Rs. 50,000/-, fair market value of the property

(b) for a consideration – fair market value less consideration exceeds Rs. 50,000/-, the fair value less consideration.

w.e.f 1-6-2010 following items added:-

1. Bullion
2. Receipt of shares of a closely-held company without consideration or inadequate consideration is taxable. S. 50(2) (viia)

A.  Provision not applicable in case of the following restructuring:

i.            Transfer of shares of Indian company by amalgamating foreign company to amalgamated foreign company
ii.            Transfer of shares of Indian company by de-merged foreign company to resulting foreign company
iii.            Transfer by shareholder of co-operative bank in a business reorganization of a co-operative bank.
iv.            Transfer by shareholder of shares of amalgamating company

B. Receipt of shares of a closely-held company by a firm (including LLP) or a closely- held company taxable if transfer is without consideration or for inadequate consideration.

C. Fair market value less consideration is taxable, subject to difference of more than Rs.50,000.

D. Amount taxed to be treated as cost of acquisition in the hands of recipient.

Relatives from whom Gift is permissible

List of Male Donors	List of Female Donors
Father (Papa or Pitaji)	Mother (Maa or Mummy)
Brother (Bhai)	Sister (Bahin)
Son (Beta or Putra)	Daughter (Beti or Putri)
Grand Son (Pota or Potra)	Grand Daughter (Poti or Potri)
Husband (Pati)	Wife (Patni)
Sister’s Husband (Jija)	Brother’s Wife (Bhabhi)
Wife’s Brother (Sala)	Wife’s Sister (Sali)
Husband’s Brother (Dewar)	Husband’s Sister (Nanad)
Mother’s Brother (Mama)	Mother’s Sister (Mausi)
Mother’s Sister Husband (Mausa)	Wife’s brother’s wife (Sala Heli)
Father’s Brother (Chaha or Tau)	Father’s Brother’s Wife (Chachi or Tai)
Father’s Sister’s Husband(Fufa)	Father’s Sister (Bua)
Grand Father (Dada)	Grand Mother (Dadi)
Great Grand Father (Pardada)	Great Grand Mother (Pardadi)
Daughter’s Husband (Jawai)	Son’s Wife (Bahu or Putra Vadhu)
Wife’s Father (Sasur)	Wife’s Mother (Sas)
Husband’s Father (Sasur)	Husband’s Mother (Sas)
Wife’s Grand Father (Dada Sasur)	Husband’s Grand Mother (DadiSas)
Husband’s Grand Father (Dada Sasur)	Wife’s Grand Mother (Dadi Sas)
Wife’s Great Grand Father(Bada Dada Sasur)	Husband’s Great Grand Mother (Badi Dadi Sas)
Husband’s Great Grand Father(Bada Dada Sasur)	Wife’s Great Grand Mother (Badi Dadi Sas)
Brother’s Wife(Bhabhi)	Mother’s Brother’s Wife (Mami)
	Husband’s Brother’s Wife(Devrani or Jithani)

Notes:

1. Subject to clubbing provisions applicable for Gift received from Spouse and Parent-in-Law.
2. The individual can receive gifts without attracting tax also from lineal ascendents and decendents of the individual/spouse of the individual other than those mentioned in the above chart.

Valuation rules for determining ‘fair market value of gifts’

Background:

The Finance (No. 2) Act, 2009 has inserted clause (vii) in section 56(2) of the Income-tax Act (‘the Act’) to tax an Individual or a Hindu Undivided Family (HUF) who is receiving any asset which is in the nature of shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures or any work of art (specified assets) without consideration or for inadequate consideration i.e. consideration which is less than fair market value (FMV) by an amount exceeding Rs. 50,000. Further, the Finance Bill, 2010 proposes to insert a similar provision to tax receipt of shares of a closely-held company by a firm or another closely held company. If Bill is enacted and become part of the law, then, the rules notified will also apply to the valuation of shares covered by the proposed provisions.

Synopsis of the Rules

The rules 11U and 11UA prescribes the different methods for the purpose of valuation of specified assets.

The FMV of the specified asset needs to be determined on a date on which such specified assets are received by the assessee.

The determination of FMV, under this rule, will be only for the purpose of section 56 of the Act.

Notification No. 23/ 2010, which shall come into force from 1st October, 2009. Further, specified assets received from relative are not covered by the provisions of Section 56(2)(vii) of the Act.

Methods of Valuation

1. 1. Valuation of Specified assets (other than shares & securities)

Description of the property	Basis for determination of FMV
Specified assets other than shares and securities	Estimated price which specified asset will fetch if sold in the open market on the valuation date.
In case if specified assets are received by the way of purchase on the valuation date from the Registered Dealer (means a dealer who is registered under Central Sales-tax Act, 1956 or General Sales-tax Law for time being in force in any state including value added tax laws).	FMV is the Invoice Value of the asset.
In case if specified assets are received by any other mode and the value of the specified assets exceeds Rs. 50,000.	The assessee may obtain the report of registered valuer in respect of the price it would fetch if sold in the open market on the valuation date. A registered valuer is a person who is entitled to function as registered valuer for the purpose of the Wealth Tax Act.

1. 2. Valuation of Shares & Securities

• Valuation of Quoted Shares & Securities

Description of the property	Basis for determination of FMV
If quoted shares and securities are received by way of transaction carried out through any Recognized Stock Exchange (RSE)	Transaction value recorded in such RSE.
If quoted shares and securities are received by way of transaction carried out other than through any RSE.	Lowest price quoted on any RSE on the valuation date. If in case there is no trading on the valuation date, then, FMV will be lowest price on the date immediately preceding the valuation date when trading happened.

• Valuation of Un-quoted Shares

Description of the property

Basis for determination of FMV

Unquoted Equity Shares

Value as per the balance sheet (including notes thereto) on the valuation date in terms of the following formula: (A – L) x PV ————— PE Where, A = Book value of assets in balance sheet less advance income-tax paid, any amount which does not represent the value of any asset, including debit balance in profit & loss account L = Book value of liabilities in balance sheet less (i) paid-up equity capital; (ii) amount set aside for undeclared dividend; (iii) reserves, other than towards depreciation; (iv) credit balance in profit & loss account; (v) amount of provision for tax, other than advance income-tax paid in excess of tax payable with reference to book profits (minimum alternate tax); (vi) provision towards unascertained liabilities; (vii) provision towards contingent liabilities. PE = Total amount of paid-up equity share capital PV = Paid-up value of such equity shares received

• Valuation of Unquoted Shares other than equity shares

Description of the property	Basis for determination of FMV
Unquoted shares and securities other than equity shares in a company which are not listed in any RSE	Price it would fetch if sold in open market on the valuation date & the assessee is required. To obtain a report from a Merchant Banker or a Chartered Accountants in support of the FMV