How to Ensure Cash Gifts from Parents and Relatives Won’t Land you in Tax Trouble

Introduction

In India, people love gifting various kinds of gifts to family, friends, and relatives to show their love and gratitude. It is an expression of joy and happiness that portrays humbleness. They are taxable income according to the Income Tax Act. Income tax on the gift received from parents is not charged. Before 2004, income tax was not introduced for gifting. It was after this year that some alterations were made in the gifting and taxation aspect.

Historical Context of Gift Tax

The concept of taxing gifts in India has seen various changes over the decades. Initially, the Gift Tax Act was introduced in 1958. Under this act, gifts, both movable and immovable, were taxed if their value exceeded a certain limit. However, gifts from specific relatives, including parents and children, were exempted from this tax, recognizing the cultural and traditional importance of gifting within families in India.

In 1998, the Gift Tax Act was abolished, leading to a period where gifts were not taxed. This period saw a rise in the misuse of this provision, with many using it as a loophole to evade taxes by disguising income as gifts.

Recognizing the potential for misuse, the government reintroduced the taxation of gifts under the Income Tax Act in 2004. Under Section 56(2)(v) and later amendments, gifts received by any individual or Hindu Undivided Family ( HUF ) over ₹50,000 in a year would be taxed as income unless they were from a defined relative or received during specific occasions like marriage. For this purpose, the definition of “relatives” included parents and children, ensuring that genuine gifts within families remained untaxed.

Over the years, the rules have been refined to address various ambiguities and potential areas of misuse. For instance, the definition of gifts was expanded to include immovable property and certain movable properties received without or for inadequate consideration.

In the context of gifts from parents to children, the regulations have always been considerate of the familial bond and cultural practices. While the tax laws have evolved, the essence has remained – genuine gifts, especially within the immediate family, should not be burdened with tax implications.

Gifting and Taxation

●    Any gift that is cash, property, valuables, or possessions given from one person to another that exceeds Rs 50,000 is counted under the head “income from other sources” and taxed accordingly.

●    However, it does not apply to gifts received from relatives. Friends are not in this category, so the gifts received from them that are more than Rs 50, 000 will be taxed as per The Income Tax Act  Income tax on gifts received from parents is not taxable as per the law.

●    There are no restrictions on the amount gifted, which is not taxable, but in the case of people other than family or relatives, it is charged for tax if the sum exceeds the prescribed limit.

●    Therefore, income tax on gifts received from parents is not taxable under the law.

●    But the money or gift received without consideration from any individual to another person of HUF is taxable if the prescribed amount exceeds Rs 50,000.

For example:

• Suppose an individual receives Rs 40,000 from a friend on their anniversary. This is not charged in tax as this doesn’t exceed the aggregate limit.
• The individual who received Rs 58,000 on their anniversary from a friend is taxable as income. Here the amount exceeded Rs 50,000 and will be chargeable for taxation.

Gifts received from Parents and Relatives.

Income tax on the gift received from parents is not charged as per the law. The money or gifts are exempt in this case only and not for other individuals.

Where it is exempt

• Income tax on the gift received from parents or relatives is exempt if it is given during a marriage ceremony or occasion. They can also transfer through a gift deed.
• Money or assets received from a will or any inherited aspect is free from income tax and is not charged, just like in the case of income tax on gifts received from parents.
• At the same as, income tax on the gift received from parents are exempt from any charges, and money accepted during the contemplation of death or Karta of the HUF is not chargeable to tax.
• The money accepted from a local institution, authority, hospital, fund, foundation, or charity is exempt from income tax.
• If it is given from any amalgamating company, that is an Indian Company.
• If the gift was received during the partial partition or total partition of any HUF and joint family, similar to the income tax on the gift received from parents is exempt.
• The gifts and amounts received by the parents of the bride and groom are not free from tax. Only the couple can enjoy certain benefits because it’s their marriage ceremony. The income tax on the gift received from parents is not charged.

Income tax on gifts received from parents who reside abroad or a child who stays outside India is also not charged to tax. However, if any relative sends it from abroad, it is chargeable as per the Income Tax Act

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 Gift From Father to daughter under Income Tax Act,1961

Section 2(41) of the Income Tax Act, 1961, gives the following definition of the term “relative”: “Relative,”  in relation to an individual, means the husband, wife, brother, sister, or any lineal ascendant or descendant of the individual.

Gifts from the father to the daughter are tax-free, regardless of the amount. A parent would be considered a “relative,”; thus, a gift from a father to a daughter will not be taxed in his hands as income. Without having any financial consequences for the kids, parents are free to give their kids any amount of money from their taxable income. Parents and kids fall under the defined category of “relatives,” who are excluded from paying income tax under the Income Tax Act.

Income tax on gifts received from parents who reside abroad or a child who stays outside India is also not charged to tax. However, if any relative sends it from abroad, it is chargeable as per the Income Tax Act

Taxable Gifts

There are gifts that are taxable when received from relatives and friends :

• Money: money can be transferred via any method, such as cash, cheque, or an electronic transfer. This is not charged when income tax on the gift received from parents is applied, but other than this case others are charged if the aggregate exceeds Rs 50,000 in a financial year. This will be counted in the whole amount and not just what they received after 50,000.
• Any immovable property: Any individual can gift their land, property, or asset to their loved ones or someone they are affectionate for. This is often with no consideration or some adequate consideration or mutual consent with transferring the ownership rights.

Gifts from close relatives are also tax-free

Under section 56 (2)(x) of the Income Tax Act, gifts received from “specified” relatives are exempt from tax. These specified relatives include spouse, brother or sister and their spouses, brother or sister of either of the parents, any lineal ascendant or descendant such as Parents, Grandparents, Children, etc. and their spouse etc

Tax rules for wedding gifts

If the cost of gifts received by a newly-wed couple exceeds Rs.50,000 and it has not been presented by the individual listed as an immediate family member under Section 56 of the Income Tax Act then it would be taxable. In such cases, the tax will be charged to the recipient. For example, your gifts from your friends worth Rs.45,000, you will not be charged any tax but if you get another gift whose monetary value is Rs.10,000, then the total monetary value of the gifts you have received would be Rs.55,000, and this whole amount would be subject to tax based on the slab rate associated with ‘income from other sources

In India, Income tax is not levied on gifts received on the occasion of marriage regardless of their value or form. This includes cash, stocks, jewelry, automobiles, electronics, artifacts, and immovable property such as houses or land. However, a newly married couple will have to pay stamp duty up to Rs.50,000 if they receive immovable property as a gift from unrelated individuals.

Cash received as gifts should be preferably deposited in the bank accounts around marriage dates to avoid any tax implications. If you are getting high-value gifts like houses or cars, get a gift deed made near the wedding date. It is recommended that you maintain a record of all wedding gifts, including cash, precious jewelry or gold, etc., for proper asset documentation.

When are gifts taxed?

Even though gifts are tax-exempt, any income that is generated from these gifts will be taxed. For example, if a couple earns income, from a property received as a gift, in the form of rent then that income will be subject to tax. Likewise, if they sell that property in the future, any capital gains will be taxable.

Income Generated from the Wedding Gifts

A newlywed couple is not taxed on the presents they receive at their wedding, but they are taxed on the income generated as a result of their gifts. For instance, if a couple got property as a gift and then they rent it out, the income they made in the form of rental income is taxed. The capital gain resulting from that property will also be taxed if the couple decides to sell it in the future.

It is advised to maintain sufficient documentation of gifts ( such as gift deeds etc. ) received at the time of the wedding as income tax proof in order to take full advantage of the tax exemptions that are permitted.

What Is the Gift Tax Exclusion for 2024 (Filed in 2025)?

 The IRS recently announced that the annual gift tax exclusion for tax year 2024 will increase to $18,000 for individuals and $36,000 for married couples filing jointly. The lifetime gift tax exclusion also rises to $13.61 million ( $27.22 million for married couples filing jointly ).

It’s important to note, however, that the lifetime gift tax exclusion wasn’t always that high. It rose dramatically following the signing of the Tax Cuts and Jobs Act ( TCJA ). Often known as the Trump Tax Plan, these tax cuts are scheduled to expire at the end of the year 2025.

Nonetheless, some lawmakers are pushing to make them permanent. Still, political changes may impact the provisions of this massive tax overhaul before then. So it’s important to keep track and seek the help of a financial advisor or tax professional when dealing with gift-tax matters.

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