Received money, shares or property as a gift? It may be tax-free, but here's when you will have to pay tax

You may receive money, shares or property as a gift from family or friends and it may seem like a ‘free lunch’ at first, until the tax rules say otherwise. Not every gift you receive is tax-free, and not every gift is taxable either.

The tax treatment depends on who gave you the gift, its value, the occasion on which you received it, and even what you do with it later, such as selling it.

When are gifts exempt from tax?

Gifts received from the following specified relatives are fully exempt from tax, regardless of their value:

• Spouse
• Brother or sister of the individual or their spouse
• Brother or sister of either parent or parent-in-law
• Any lineal ascendant or descendant of the individual or their spouse (such as parents, grandparents, children or grandchildren)
• Spouse of any of the above relatives

In some cases, gifts received on specified occasions are also not taxable, irrespective of from whom the gift is received. These include:

• Marriage of an individual
• Under a will or by way of inheritance
• In contemplation of death of donor
• Distribution of capital assets on the total or partial partition of a Hindu undivided family, where the recipient is a member of the HUF.

Additionally, money or assets received in form of gifts are not taxable if its received from any fund, trust, university or any other educational institution.

The same rule applies for gifts given by a hospital or other medical institution established for charitable, educational or religious purposes and approved by the prescribed authority.

Tax rules on gifts in form of cash

Any gift from a specified relative, including parents is non taxable. However receipt of gift in the mode of cash exceeding ₹2 lakhs is not permissible from a single person in a day, for a single transaction, or on a single occasion, as per Section 269ST of the Income-tax Act.

Any violation of this provision can attract penalty and scrutiny from the income tax department. This rule was introduced by the government to curb the black money and tax fraud in the economy, according to a Cleartax report.

When gifts become taxable in the hands of the recipient?

Meanwhile, gifts received from non-relatives such as friends or other people who are not mentioned in the above list, are taxable under the head 'Income from Other Sources' if the aggregate value of all such gifts received during the financial year exceeds ₹50,000.

The provisions relating to gift tax have been dealt with under Section 56(2)(vii) of the Income Tax Act, 1961.

When exempt gifts become taxable later?

A gift that is exempt from tax when you receive it does not always remain tax-free forever. If you later sell a gifted asset, such as a house, plot of land, jewellery or shares, any profit from the sale will be subject to capital gains tax.

For the purpose of calculating capital gains, the cost of acquisition and the holding period of the previous owner are generally considered in cases where the asset was received as a gift or through inheritance. This determines whether the gain is short-term or long-term and the amount of tax payable.

For example, if you receive a house from your spouse as a gift and later sell it, capital gains will be calculated using your spouse's cost of acquisition and the period for which the property was held. Let's say the house was acquired by your spouse in 2005, the fair market value of the flat on 1 April, 2006 can be taken as your cost.

As per income tax rules, your spouse's holding period will also be added to determine whether STCG or LTCG will be applicable.

STCG applies if the property is held for 24 months or less. The profit is added to your total income and taxed at your applicable income tax slab rates. LTCG applies if the property is held for more than 24 months and it is taxed at a flat rate of 12.5% without indexation.