Income-tax returns: Here's how to declare gifts, mutual fund and share transfers in ITR form

There are multiple occasions where financial gifts are exchanged between family members, and India's Income-Tax laws have provisions that allow such transactions between close relatives to be exempted from taxes. However, to avoid misuse of “gifts” for tax evasion, the laws also prescribe the declaration of such transfers and gifts in your income tax returns (ITR) while filing your taxes.

What are financial gifts and transfers?

In India, you are allowed to transfer assets (gold, property), cash, mutual fund units, and equity shares to family as a gift, which is considered to be tax-free, subject to certain terms. Here, to qualify for exemption, the recipient must be a family member.

Further, for gifts or transfers to third party recipients, all transfers over ₹50,000 in a financial year are subject to taxation for the full amount.

Tax exemption for gifts: All you need to know

• Gifts exchanged between family members (spouse, parents, children, siblings, and lineal relatives) are fully exempt, irrespective of the amount involved. This also applies to gifts given for marriage and as an inheritance.
• If the value of gifts to non-relatives (acquaintances, friends and other third parties) exceeds ₹50,000, the entire amount is taxable for the receiver.

• The gift must be declared under Section 56(2)(x) of the Income-Tax Act (ITA). On your ITR form, this will come under the head “Income from Other Sources”.
• Further, for cash gifts from employers, this is considered under the Salaries head; while a gift in kind will be taxable if the value exceeds ₹50,000.

How to disclose gifts in ITR?

Disclosure of gifts must be done under Section 56(2)(x) by the recipient in Schedule OS of your ITR 2 or 3.

Why should you disclose gifts / transfers in ITR?

• It is mandatory to disclose income in the ITR, and doing so ensures transparency. For high-value transfers, especially, this ensures your tax profile is in congruence with your Annual Information Statement (AIS) and prevents a mismatch alert for tax authorities.

• It is advisable to maintain bank statements, demat account statements, property papers, gift deed and proof of relationship documents, in case a transactions triggers tax notice.
• The tax department will also consider profile of donor to check if the gift given is affordable in accordance with past creditworthiness. This is a means to eliminate black money laundering through gifts.

What is Section 56(2)(x) of ITA?

Section 56 of the ITA oversees taxation of Income from Other Sources (i.e. dividends, lottery, income from securities, life insurance maturity, gifts, deeds, etc.) that can't be categorised under other heads such as capital gains, salary or rent.

Within this, Section 56(2)(x) deals with movable and immovable gifts that are taxable unless received from relatives or on special occasions (e.g. marriage, inheritance).

Who is considered as family / relative under I-T law?

• Spouse of the individual,
• Brother/sister of the individual,
• Brother/sister of the spouse of the individual,
• Brother/sister of either of the parents of the individual,

• Any blood relative/offspring (Lineal ascendant or descendant of the individual)
• Any blood relative/offspring of the spouse (Lineal ascendant or descendant of the spouse of the individual)
• Spouse of the individuals referred to above.
• For a Hindu undivided family (HUF), any member thereof

Are there any other exceptions?

• Gifts received during marriage are non-taxable.

• Gifts received under a will or by way of inheritance and gifts received in contemplation of the death of the donor (for example, a terminally ill person anticipating death in the near future) are also tax-free.
• The sale of movable property and personal effects other than shares and securities is not taxable. This includes art, bullion, collections, furniture, jewellery, sculptures, and vehicles.

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