TAXATION OF GIFTS - NEW VALUATION RULES

[Dr. Sanjiv Agarwal]

Who would not like to take a gift - and a gift which has a enduring value (both, economic and emotional) - a dream house, shares, securities jewellery, works of art and so on. But beware, next time when you receive a gift, go by the rule book which may force you to pay taxes on the value of gifts so received (of course, if it is not exempt from income tax).

Section 56 of the Income Tax Act was amended last year w.e.f. 1 October, 2009 to tax certain gifts under income tax (although gift tax was abolished in 1998 itself). If any individual or a Hindu Undivided Family (HUF) receives any gift on or after October 1, 2009 it would be charged to income tax in the lands of the recipients (donee) as income from other sources. However, tax would be levied only if gifts are received by individuals or HUF received after October 1, 2009, such gifts are not exempted gifts and fall in any of the specified five categories. The provision are applicable to all donors and donees, whether residents or non residents.

There are certain gifts which are exempt from tax. These include money or property received from relatives or on marriage (gifts on other occasions are taxable) or under a will or in contemplation of death of payer or from a local authority, fund, foundation, hospital, university etc.

Exempt Gifts

* Gift from relatives

* Gifts on occasions of marriage

* Gifts under a will

* Gifts in contemplation of death of payer

* Gifts from local authority/ fund/ university etc

The gifts on which tax would be payable would cover five categories of gifts whose value exceeds Rs 50000 in aggregate. These include money (cash or any bank instrument ) received as gifts from one or more persons whose aggregate value exceeds Rs 50,000, movable properties with aggregate fair market value exceeding Rs 50,000, movable property with a lesser consideration than its fair market value where difference is more than Rs 50,000, any immovable property without consideration whose stamp duty value exceeds Rs. 50,000 and any immovable property at a lesser consideration than its stamp duty value with difference exceeding Rs 50,000. Thus, in all these cases, tax would be payable if value exceeds Rs 50, 0000.

The other conditions for taxation on gifts are that it should be received by an individual or HUF. Corporate gifts or gifts to firms or body corporates are not covered. These gifts should be given or received on or after 1 October, 2009. So far as monetary limit of Rs 50000 (Rupees fifty thousand) is concerned, in case of immovable property, single transaction shall be considered whereas for movable properties, aggregate of all transactions during the given period shall be taken into account.

The gifts of movable properties could be jewellery, archeological collections. drawings, paintings, sculptures or work of art or any shares or securities.

Taxable Gifts

* Money

* Jewellery / bullion

* Shares, stocks and securities

* Archeological collections

* Drawings, paintings and works of art

On how such gifts be valued, Government has recently prescribed valuation rules (Notification No 23/2010 dated 8th April, 2010) which will be applied retrospectively from October 1, 2009. Accordingly, for the value of shares, warrants, preferential shares etc. for listed stocks, the value will be as per quoted precise on recognized stock exchanges. If shares are transacted elsewhere, market value will be the lowest price on the valuation date. For unlisted equity shares, book value would be taken. For other shares, estimated price at which such shares could be sold in market as certified by merchant banner or accountant would be taken. In case of jewellery, price at which it could be sold in open market would be considered as fair market value. If it is purchased from a registered dealer, invoice price would be considered. In other cases, report of registered valuer would be considered. Similar criteria has been prescribed for archeological collections and artistic works.

So next time you gift to some one dear to you or you receive some gift, beware that it may not fully be tax free. Just keep new valuation rules in mind.