Receiving a gift from a friend or someone outside your immediate family may seem like a pleasant surprise, but it could also have tax implications. Under the Income Tax Act, gifts received from non-relatives above a specified limit are treated as taxable income.
Depending on your total income and the tax regime you choose, Section 87A may significantly reduce or even eliminate, the tax payable on such gifts.
When do gifts become taxable?
Under Section 56(2)(x) of the Income-tax Act, gifts received from non-relatives become taxable if their total value exceeds Rs 50,000 in a financial year. If this threshold is crossed, the entire value of the gift is taxed under the head 'Income from Other Sources' at the applicable income tax slab rates.
This rule applies to gifts received in the form of cash, immovable property, shares, securities and certain other assets, unless they fall under one of the exemptions provided in the law.
Also Read: Tax Rules Explained: What Happens When You Gift Shares To Relatives?
How Section 87A can reduce your tax liability
Although taxable gifts are added to your income, resident individuals may still be able to avoid paying tax if they qualify for the Section 87A rebate.
Under the new tax regime, taxpayers can claim a rebate of up to Rs 60,000, provided their normal taxable income does not exceed Rs 12 lakh. Under the old tax regime, resident individuals can claim a rebate of up to Rs 12,500 if their total taxable income does not exceed Rs 5 lakh. The rebate is available only to resident individual taxpayers and is equal to 100% of the income-tax liability or the maximum prescribed rebate limit, whichever is lower.
When gifts are completely tax-free
Not every gift is taxable, even if its value exceeds Rs 50,000. The Income-tax Act provides exemptions for gifts received under certain circumstances.
These include gifts received:
- On the occasion of an individual's marriage.
- Through a will or by way of inheritance.
- In contemplation of the death of the donor.
Who can give tax-free gifts?
Certain gifts remain exempt regardless of their value if they are received from specified persons or institutions. These include:
- Specified relatives
- Local authorities.
- Any trust, institutions, universities, educational institutions and hospitals covered under the Income-tax Act.
- Trusts created solely for the benefit of a relative.
For Hindu Undivided Families (HUFs), every member of the HUF is treated as a relative for the purpose of the gift tax provisions. In the case of individuals, the definition of a relative is limited to specified family members, including a spouse, parents and children, among others. Step-siblings, nephews, nieces and cousins are not regarded as relatives under these provisions.
Conclusion
Receiving a gift worth more than Rs 50,000 from a non-relative does not automatically mean you will have to pay tax. While such gifts are generally taxable, eligible resident individuals whose total income remains within the prescribed limits may be able to use the Section 87A rebate to reduce their tax liability to nil.
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