WHAT
IS GIFT TAX? WHAT ARE INCOME CLUBBING
PROVISIONS AS TO GIFTS IN INDIA AND THEIR TAX IMPLICATIONS?
By K P C Rao., LLB.,
FCMA., FCS
Practicing Company Secretary
kpcrao.india@gmail.com
1. BACKGROUND
Gift
tax in India is regulated by the Gift Tax Act, 1956 which was constituted on
April 1, 1958. It came into effect in all parts of the country except Jammu and
Kashmir. Under this Act gifts
by taxpayers to their close relatives and others were brought under the tax net
for the first time in India at the instance of Nicolas Kaldor who gave to India
its “integrated system of taxation” where he recommended wealth tax,
expenditure tax and gift tax to make a more complete picture with the then
prevailing income tax on incomes and estate duty on estate passing on death.
This levy on gifts was
recommended as a measure of plugging a loophole by gifts by wealthy persons
just prior to death thereby escaping estate tax which could only be levied on
wealth passing on death of that person. Estate duty was
abolished in 1985 and ordinarily gift tax should have also been abolished
around the same time. However, the government found several positive benefits
of retaining gift tax as a source of revenue. Needless to state, the levy of
gift tax was always on the donor of gifts and the tax was linked to the value
of the gift.
With effect from
October 1, 1998, this donor-based gift tax was abolished and it was proposed to
substitute it by donee-based gift tax. However, for several reasons including
serious anomalies in the done-based gift tax, gift tax on the donee was not
made into law. However, Budget 2004 has
brought back the donee-based tax on gifts through the backdoor by treating
certain gifts as income of the recipient donee and recovering income tax on
such amounts of gifts received. Thus we now have income tax on the sum of money
received after September 1, 2004 as gifts from non-relatives.
Accordingly, gifts
from non-relatives are included as income under section 56(2)(v) of the Act
with effect from September 1, 2004. The basic exemption initially was Rs
25,000. However, gifts from relatives are exempt without any limit. The purpose of the
provision is to tax primarily gifts from non-relatives including from friends
from abroad. This basic exemption of Rs 25,000 received as gift from
non-relatives was raised to Rs 50,000 with effect from April 1, 2006.
The Income Tax Office is
empowered to collect the assessed tax, directly from the donee but the amount
will be what the donor would have paid on the clubbed income. However, the
Income Tax Office is required to serve on the donee a notice of demand.
2. WHAT
IS A GIFT?
As
per Section 2 (xii) of the Gift-Tax Act, 1958, ‘Gift’ means the transfer by one
person to another of any existing movable or immovable property made
voluntarily and without consideration in money or money’s worth, and includes
the transfer or conversion of any property referred to in section 4 of Gift Tax
Act, 1956, deemed to be a gift under that section. According
to Explanation
given under this section a transfer of any building or part thereof referred to
in clause (iii), clause (iiia) or clause (iiib) of section 27 of the Income-tax
Act by the person who is deemed under the said clause to be the owner thereof
made voluntarily and without consideration in money or money’s worth, shall be
deemed to be a gift made by such person.
(a) What
about the gifts received between 01.04.2006 to 30.09.2009?
Where
any sum of money, the aggregate value of which exceeds Rs. 50,000 is received without
consideration by individual/HUF, the whole of aggregate value is taxable as income
from other sources.
Provided
that this clause shall not apply to any sum of money received;
(a) from
any relative; or
(b) on
the occasion of marriage of the individual; or
(c) under
a will or by way of inheritance; or
(d) in
contemplation of death of the payer.
(b) What
about the gifts received on or after 01.10.2009?
With
effect from 1.10.2009, new clause [Sec. 56(2)(vii)] is introduced for charging
of Gifts received by individual/HUF. Earlier, only gifts received in the sum of
money was chargeable under Income Tax Act. However w.e.f. 01.10.2009 gift
received in kind is also chargeable subject to certain conditions. The new
provisions are described as under:
I. If
any sum of money received without consideration, the aggregate of which exceeds
Rs. 50,000, the whole of
such sum will be chargeable.
II. If
any immovable property received –
(a)
without consideration, the stamp duty
value of which exceeds Rs.
50,000,
the stamp duty value of such property will be chargeable.
(b)
For a consideration, which is less than
stamp duty value of property by an amount exceeding Rs. 50,000, the stamp duty
value of such property as exceeds such consideration will be chargeable.
III.If
any property other than immovable property received –
(a)
without consideration, the aggregate
fair market value (FMV) of which exceeds Rs. 50,000, the whole of aggregate FMV of
such property will be chargeable.
(b) For
a consideration, which is less than the aggregate FMV by an amount exceeding Rs. 50,000, the aggregate
FMV as exceeds such consideration will be chargeable.
However any such gifts
received from relatives shall not be treated as income.
(c) What is the Meaning of a Relative?
Explanation to Sec. 56(2) (vi) provides that the expression
"relative" means:
(1)
Spouse of the individual;
(2)
Brother or sister of the individual;
(3)
Brother or sister of the spouse of the individual;
(4)
Brother or sister of either of the parents of the individual;
(5)
Any lineal ascendant or descendant of an individual;
(6)
Any lineal ascendant/descendant of spouse of the individual
Meaning
of the expression ‘Relative’ in terms of the explanation given under Section
56(2) (vi) of the I.T Act can be better explained with the following diagram:
Surprisingly, and for no particular reason, this
definition differs from the definition as contained in Securities Contracts
(Regulation) Act, 1956 and also in the Companies Act, 1956. Take the instance
of Miss X whose mother's brother is Mr. Y. Yes, Y is a relative of X (Mother's
brother) but X is not a relative of Y (Sister's daughter). One may presume if X
is a relative of Y, the Y is also a relative of X. Surprisingly it is not under
Sec. 56(2) (vi)!
Significantly,
the clubbing provisions in the Income Tax Act 1961 and Wealth Tax Act, 1957 are
not deleted. Therefore, income and wealth from assets transferred directly or
indirectly without adequate consideration to minor children, the spouse
(otherwise than in connection with an agreement to live apart) or
daughter-in-law will continue to be deemed income and wealth of the transferor.
Same is the case when assets are held by a person or an Association of Persons for
benefit of assesses, the spouse, daughter-in-law and minor children. Therefore,
now the gift received during the previous year shall be included in the income
if the aggregate of the gifts received exceeds Rs. 50,000.
(a) Whether all the Gifts from Relatives are
Tax-Exempt?
Any gift received from relatives of any amount during financial
year is completely exempt from tax. Hence, Gift of more than Rs.
50,000/- can be received from below mentioned relatives without any taxes.
(1) Exemption for Marriage Gifts
Any gift received from
any person on occasion of marriage of the gift's recipient will not be liable
to income tax at all. Also there is no monetary limit attached to
this exemption, which is provided by Section 56(2) (vi).
(2) Tax-Exempt Gifts from other
Persons
Besides gifts received
from relatives or on occasion of marriage, following are the other gifts which
are completely tax-exempt as provided in Section 56(2) (vi) of the I.T. Act:
1) Gift received from a
Will or by way of inheritance;
2) Gift received in
contemplation of death of the donor;
3) Gift from a local
authority;
4) Gift received from any
fund, foundation, university or other educational institution or hospital or
any trust or any institution referred to in Section 10(23C); and
5) Gift received from any trust/institution,
which is registered as public charitable trust or institution u/s 12AA.
(3) Gifts in Kind are Tax-Exempt
Provisions relating to
the taxation of gifts from non-relatives & non-specified persons in excess
of Rs.
50,000 will be liable to income tax only when the gift is sum of
money, by way of cash, cheque or a bank draft. Gifts in kind like a gift of shares,
gift of land, gift of house, gift of units or even mutual funds, jewellery,
etc. shall not be liable to any income tax at all.
1. CLUBBING
PROVISIONS
(a) Under
the Income-tax Act, 1961
Under the Income-tax Act, 1961, an assessee is
generally taxed in respect of his own income. However, there are certain cases
where as assessee has to pay tax in respect of income of another person. The
provisions for the same are contained in sections 60 to 65 of the Act. These
provisions have been enacted to counteract the tendency on the part of the
tax-payers to dispose of their property or transfer their income in such a way
that their tax liability can be avoided or reduced.
In the case of individuals,
income-tax is levied on a slab system on the total income. The tax system is
progressive i.e. as the income increases, the applicable rate of tax increases.
Some taxpayers in the higher income bracket have a tendency to divert some
portion of their income to their spouse, minor child etc. to minimize their tax
burden. In order to prevent such tax avoidance, clubbing provisions have been
incorporated in the Act, under which income arising to certain persons (like
spouse, minor child etc.) have to be included in the income of the person who
has diverted his income for the purpose of computing tax liability.
Sections 60 to 65 of the Act deal
the following situations:
a) Transfer of income without transfer of asset [Section 60]
b) Income arising from revocable transfer of assets [Section 61]
c) Exceptions
where clubbing provisions are not attracted even in case of revocable transfer
[Section 62]
d) Clubbing
of income arising to spouse [Section 64(1)(ii)]
e) Transfer
of assets for the benefit of spouse [Section 64(1)(vii)]
f)
Income arising to son’s wife from the
assets transferred without adequate consideration by the father-in-law or
mother-in-law [Section 64(1)(vi)]
g) Transfer of assets for the benefit of
son’s wife [Section 64(1)(viii)]
h) Clubbing of minor’s income [Section
64(1A)]
i) Cross
Transfers
j) Conversion
of self-acquired property into the property of a Hindu Undivided Family
[Section 64(2)]
The main distinction between the
two sections is that section 61 applies only to a revocable transfer made by
any person while section 64 applies to revocable as well as irrevocable
transfers made only by individuals.
It is significant to note that as
per the Explanation 2 to section 64, ‘income’
would include ‘loss’. Accordingly,
where the specified income to be included in the total income of the individual
is a loss, such loss will be taken into account while computing the total
income of the individual. This Explanation is also equally applies to clubbing
provisions under both sections 64(1) and 64(2).
Sections 61 to 64 provide for
clubbing of income of one person in the hands of the other in circumstances
specified therein. However, service of notice of demand (in respect of tax on
such income) may be made upon the person to whom such asset is transferred
(i.e. the transferee). In such a case, the transferee is liable to pay that
portion of tax levied on the transferor which is attributable to the income so
clubbed.
(b)
Under Wealth Tax Act, 1957
According
to Section 4 of the Wealth
Tax Act, 1957,
the following transfers shall be included in the net-wealth of an assessee:
<(1) Assets
transferred to spouse [Section 4(1)(a)(i)]
(2) Assets held by minor child [Section
4(1)(a)(ii)]
(3) Assets transferred to a person or
association of persons [Section 4(1)(a)(iii)]
(4) Assets transferred under revocable
transfers [Section 4(1)(a)(iv)]
(5) Assets transferred by an individual
to son’s wife or son’s minor child including step child and adopted child
[Section 4(1)(a)(v)]
(6) Assets transferred by an individual
for the benefits of son’s wife [Section 4(1)(a)(vi)]
(7)
Interest
in the assets of the firm, etc. [Section 4(1)(b)]
(c) Gift under a Will or in
contemplation of Death
Gifts under a will or in contemplation
of death do not attract stamp duty. According to section 191 of the Indian
Succession Act (ISA), Gifts can be made in contemplation of death by a person
who is ill and expects to die shortly delivers to another the possession of any
movable property (Not immovable) as a gift in case he dies. Such a gift may be
revoked by the donor if he recovers from the illness.
(d) Gifting
Minors & Realty
Even
gifts received by minors will be brought within the purview of taxes by means
of clubbing of income, in case of both parents having taxable income; it will
be clubbed with the parent who is earning the highest.
Real
estate deals done for values lower than the rates fixed by state governments /
local bodies will also be taxed. Here, the tax will be levied on the difference
of amount between state government's rate and purchase price. The tax needs to
be paid by the buyer of the property.
2.
HINTS FOR TAX PLANNING
ü The
main advantage of gifts accrues from the fact that in the case of spouse or
daughter-in-law, income on income is not clubbed. If the spouse has no other
income, no tax is payable unless the interest on interest crosses the minimum
threshold of Rs. .
50,000. In other words, instead of investing in your own name, and pay tax
thereon, it is better to give a gift, pay tax on the original corpus gifted and
keep on building a corpus for your spouse. Yes, it is cumbersome to keep track
of what is clubbable and what is not, but may be worth the effort.
ü Unfortunately,
this strategy cannot be used in case of minors since their entire income,
including interest on interest, is clubbed in the hands of the parent having
higher income than that of the other. There is a small solace in the form of
exemption of Rs.
1,500 per child on income earned by the child. More the number of children
better is the advantage. Forget family planning!
ü Notwithstanding
all this, it is necessary to ensure that if you have any minor children, you
earn an income of at least Rs.
1,500 for each of them. Income up to that level is free from income tax.
ü Are
you (or your son) intending to get married in a near future? A good idea is to
give a fiancée a handsome gift before the marriage. Even the first stage
interest will not be taxed in your hands.
ü Suppose
you do not have enough funds to invest the maximum amount necessary to bring
down your taxes in avenues covered by section 88 and also takes advantage of
the freedom from the tax. You can contribute up to Rs. 99,000 every year to a
PPF account in the name of the child, major or minor and only `Rs. 1,000 to your own
account. It is treated as gift but the associated clubbing provision is
rendered toothless, since the interest on PPF is tax-free.
ü You
may gift your wife (or daughter-in-law) shares of companies, which are
announced bonuses. The capital gains on bonus escape clubbing whereas the loss
on original holding arising out of the bon
ü Husbands may give gifts, out of natural love and affection, to someone else’s wife and vice versa. Utmost care is taken to ensure that husband of the donee does not give a gift to donor’s wife. A different wife is selected every year for the favours. Such cross gifts are not permitted by the Act. The Supreme Court, in case of CIT v. Keshavji Morarji [1967] 66 ITR 142, observed that if two transactions are inter-connected and are parts of the same transaction in such a way that it can be said that the circuitous method was adopted as a device to evade tax, the implication of clubbing provisions would be attracted.
ü In a far-reaching judgment, the Delhi High Court in the case of R. Dalmis v CIT (1982) 133ITR149 held that savings made by the wife out of house hold expenses given by her husband would be separate property of the wife. Any income arising there-from cannot be aggregated with the income of the husband.
ü It has now become possible to keep the title of the money to yourself, earn income through long-term capital gain and yet avoid tax by using section 54EC or 54ED. Another method is to use equity-based schemes of mutual funds, which are tax efficient.
ü Finally, and this would surprise you most, the best method of avoiding clubbing is not to give a gift at all!
ü Some persons carefully choose cumulative schemes
like the 3-year Cumulative-FDs for a child of over 15 years of age, 6 year
NSC-VIII for over 12 years, etc. They are under the mistaken notion that the
cumulative interest received after the child becomes major will escape
clubbing. Interest on these schemes, though paid at the end of their term,
accrues on yearly basis and is brought under the ambit of income tax by section
5 of Income Tax Act.
ü There are couples that have taken a divorce just to
bypass the clubbing provision and are staying happily together.
3.
CONCLUSION
The
Gift Tax has had a bit of a roller-coaster ride in India, with a brief period
when it was abolished and then it getting renewed in a new avatar. It was found that many individuals used the
loopholes in the Gift Tax Act, to launder money. The key reason for bringing back Gift Tax in
its latest avatar is to plug loopholes and make norms more stringent. It is
clear that exchanging assets amongst relatives to evade taxes have come under
control and this has also ensured that the Income tax authorities can keep tab
on the movement of assets (movable / immovable). It is also hoped that the
new rule will effectively prevents money laundering in the guise of high value
gifts.
The
new rule related to gifts says that the receiver has to pay tax for receiving
any gift valued at `
50,000 and more. The term 'any gift'
means that not only cash but all gifts of any value. The phrase 'received without consideration' is too
much generic in nature and therefore, it is litigations-oriented. Whether sum
received by way of interest-free loan will fall into this category or not is a
question mark.
Deletion of Gift Tax Act has opened floodgates for
litigation. Determining whether a transaction is a genuine gift or not, would
be at the discretion of the Income Tax Office. Obviously ‘donor-donee’ relationship, financial ability of the donor,
justification for giving the gift, etc., have suddenly become paramount
parameters. These are essentially subjective in nature. Abolishing gift tax is
an excellent idea but not before the infrastructure handling our premier tax
legislation as well as the judiciary system is in its right place. The very
fact that the cases handled under The Prevention of Money Laundering Act 2002
(PMLA) supports the view that the effective enforcement machinery is not in place.
The PMLA came into force with effect from 1 July 2005. The
Directorate of Enforcement has so far (up to 16/05/2012) registered only 1437
cases for investigation under the PMLA. During investigation, 22 persons were
arrested and 131 provisional attachment orders issued in respect of properties
valued at ` 1,214 crore. The Directorate has filed only
38 Prosecution Complaints in PMLA-designated courts for the offence of money
laundering. Therefore, the
infrastructure in handling these cases should be strong enough so that it would
be difficult for anybody to get away with any tax evasion by adopting gifts and
the consequent Inspector.
-----------------------------
[Published in the Corporate Secretary -Monthly Journal of Hyderabad Chapter of ICSI during October,2012]
[This material is put online to further the educational goals of ‘Study in Law’. This material may be used freely for educational and academic purposes. It may not be used in any way for profit.]
[This material is put online to further the educational goals of ‘Study in Law’. This material may be used freely for educational and academic purposes. It may not be used in any way for profit.]
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