Documentation of the Gifts Received is Important for Tax Purpose

As per the Income Tax Act, any amount of money above Rs. 50,000 received as a gift shall be entirely taxable in the hands of the recipient. Also, if any movable property such as jewellery, painting, shares or securities, etc., whose fair market value is more than Rs. 50,000 or any immovable property whose stamp duty value is more than Rs. 50,000 is transferred for inadequate consideration, shall be taxable in the hands of the recipient. 

However, the money received, transfer of movable or immovable property by a specific class of persons is exempt from tax to the recipient.

For example, a gift received on the occasion of marriage or from specified relatives, or by way of inheritance, or under a will, etc., is not taxable in the recipient’s hands.

The logic behind the tax on the gift is always on the person who receives it. Any such amount or property received by the recipient without adequate consideration must be reported in the income tax return by the recipient, even if it is outside the ambit of tax. 

If the transaction is tax-free, there may be some chances that the income tax officers may ask you to prove its legitimacy or they may scrutinise your transaction. For example, if you have received a significant amount of money from your relatives outside the purview of income tax, it is preferred to execute a gift deed for the same to substantiate your transaction. You can also maintain bank statements or a copy of the cheque to justify the source of money.

Suppose the aggregate amount of gift received in the wedding is deposited in the bank account. Say Rs.5 lakh is deposited in the bank account received as a gift from various guests for the wedding. The bank will report such transactions to the income tax authorities. The tax authorities may then verify the disclosure of such income in the income tax return. Hence, it is advisable to disclose such income as exempt in the income tax return and maintain a list of guests and the amount gifted as proof for justification.

In case the immovable property is received under a will or by way of inheritance which is exempt in the Income Tax Act, it is advisable to obtain the property papers and all the details related to the acquisition of property from the original buyer (the one who has gifted) along with the copy of the will for sufficient proof. If the immovable property is received as a gift from a relative and if such transaction is exempt from tax, then it is mandatory to execute a gift deed. The gift deed acts as a mutual consensus between the donor and the donee.

For any clarifications/feedback on the topic, please contact the writer at namita.shah@cleartax.in