The gift is taxable only in the hands of the recipient
It’s not just incomes earned as salary, or through business, profession, property, or by way of capital gains that are taxable. Even some gifts are taxed, provided the value is above 50,000 during the year. Gift tax was first introduced in 1958, then abolished in 1998, but reintroduced in 2004 (effective from assessment year 2005-06).
At present, gift tax is covered under section 56(2) of the Income Tax Act, 1961. The Act provides that any gift received in excess of 50,000 in form of cash, demand draft, cheque or specified assets by an individual or Hindu undivided family (HUF) is taxable under the income tax head ‘income from other sources’. If the value exceeds 50,000, the whole amount is taxed. For instance, if your friend gave you a gift worth 40,000, you need not bother about tax. But if you get another gift, from the same person or someone else, with a value more than 11,000, the whole amount, i.e., 51,000, will be taxable.
Remember that the tax applies not only to gifts received in cash, but also to those received in kind, such as immovable property (including land or building) and specified movable property, such as jewellery, paintings, shares, debentures, bullion, archaeological collections, and so on. The gift is taxable only in the hands of the recipient.
Any sum or property received, at any point of time, from certain relatives, are exempt from income tax. According to the Act, these are your spouse (husband or wife), brothers, sisters, brothers in-law, sisters in-law, parents, parents in-law, any lineal ascendants or descendants of the individual or spouse, and brothers or sisters of parents of individual or spouse.
Apart from gifts received from relatives for whatever reason, gifts received on marriage are also exempt from tax. In addition to this, any amount received under a Will or inheritance is also exempt. Any sum of money or property received in contemplation of death is also exempt. Then, any gift received from a local authority, fund, foundation, university or other education institution, hospital, trust or charitable institution is also exempt.
What should you do?
Gifts received in the form of cash or cheque do not necessarily have to be executed through a gift deed. A simple note on a sheet of paper mentioning the details would work. However, gifting of movable property is required to be executed on stamp paper (can be of a nominal value), which then has to be notarized.
If the gift is an immovable property, it has to be backed by a registered gift deed. Not doing so means the ‘transfer’ will not have legal sanctity and the property title cannot be passed to the receiver. So, if you are being gifted, say, a house or a plot, it’s better to get a gift deed executed and registered in your favour. Doing so makes you the legal owner of the property, provides you the right of possession and the right to transfer the ownership.