In this article, we will discuss about...
Introduction
When it comes to giving gifts to friends, family, or relatives, there are a few things to keep in mind from both a legal and taxation standpoint. In India, a gift is defined as something given out of natural love and affection, without any expectation of receiving anything in return except for love and affection. A gift must be genuine, non-detainable, and you cannot give it on a benefit or reciprocal basis. It can include anything of value, such as property, money, jewelry, or art.
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Under income tax laws, each has different rules for giving gifts to family, relatives, and friends. However, the key requirement is that the gift must be genuine and non-reciprocal.
Please note that you cannot use gifts to circumvent tax provisions. For instance, if an NRI wants to avoid paying NRI TDS on the sale of a property, gifting it to their parents and having them sell it will not work, as income tax law does not recognize such gifts. Additionally, there are now 20% TDS rules applicable to such transactions, making it even more challenging to use gifting as a tax-saving measure.
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Gift Deed
When gifting a property, You must register a gift deed as it is mandatory. For small gifts of a few thousand rupees, a gift deed is not required, but it’s advisable to have one for bigger amounts, as it can serve as documentary evidence in case of any tax problems.
A gift deed outlines the details of the gift, including the asset being gifted, details of the donor and donee, and the terms and conditions of the gift. A lawyer prepares it and both parties need to sign the gift deed.
There are three costs involved in gifting:
drafting the gift deed, paying stamp duty, and registration charges. The cost of drafting a gift deed varies depending on the asset being gifted, ranging from 3,000 to 7,000 rupees. The state government levies stamp duty, which is based on the value of the asset being gifted, the kind of property, and the relationship between the donor and the donee. Registration charges also depend on the value of the asset being gifted and can range from 300 to 5,000 rupees.
You must register the gift deed with the registrar, along with payment of stamp duty and registration charges. It’s essential to note that an unregistered gift deed will not be valid, and the asset being gifted can be considered acquired from unaccounted money, attracting a high tax rate. The stamp duty cost depends on the state where the property is being gifted, so it’s important to check the rates beforehand.
Regarding taxation rules, if a gift is given with a genuine reason, such as natural love and affection, it’s not taxable as per income tax laws. However, if the gift is not given with a genuine reason or is a flexible transaction, income tax laws will apply. There is no gift tax in income tax, and neither the donor nor the recipient has to pay income tax on the gift amount.
If the recipient sells the gifted asset in the future, taxation rules will apply. The cost of acquisition of the property by the donor will be considered as the cost of acquisition for the recipient. Therefore, if the donor paid one crore rupees to buy the property, and the recipient sells it for 1.5 crores, the cost of acquisition will be considered as one crore rupees. The difference between the sale price and the cost of acquisition will be considered capital gains, and the recipient will have to pay taxes on it. If the sale price is not available
Conclusion
Gifting is a common practice in India, particularly among parents who wish to gift their children living abroad. However, it is crucial to understand the legal and taxation aspects of gifting to avoid any trouble. A gift is defined as something given out of natural love and affection, without any expectation of receiving anything in return. There are different rules for gifting to family, relatives, and friends in income tax, but the gift should always be genuine and non-reciprocal. It is important to have a gift deed for gifting a property, along with paying stamp duty and registration charges. While there is no gift tax in income tax, the taxation rules will apply if the recipient sells the gifted asset in the future. Therefore, it is essential to consider all the legal and taxation aspects before gifting any asset to avoid any tax-related problems.