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Taxability of Gift under Income Tax Act – Detailed Analysis

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As per Income Tax Act, receiver (donee) of gift is charged to taxation u/s 56(2)(vii). The donor of gift is not charged to taxation under this section. However, the below cases is analyzed from the taxation as applicable to donor ( Capital Gain taxability) and donee ( Gift taxability under I.Tax Act)

56(2)(vii): Gifts received by Individual & HUF

56(2)(vii) is applicable only when gifts are received by Individual and HUF.

Donor or Donee may be Resident or non Resident.

Cash: If aggregate value is less than Rs.50000 than nothing will be taxable. If value exceeds Rs. 50,000, the whole amount will be taxable.

Movable* Property**:

Without Consideration:

(i) If aggregate Fair Market value is less than Rs.50000/- than nothing will be taxable.

For Donor: No Capital Gain because u/s 47(iii), it is not considered transfer.

For Donee:

  • 56(2)(vii) is not applicable.

  • Cost of Acquisition (COA) will be previous owner’s Cost as per Sec 49(1).

  • Holding period of previous owner period will be counted for donee.

(ii) If aggregate Fair Market value is more than Rs.50000 :

For Donor: No Capital Gain because u/s 47(iii), it is not consider transfer.

For Donee:

  • COA will be Fair Market Value (FMV)

  • FMV shall be income from other Sources u/s 56(2) (vii).

  • Holding period will be counted from the date of acquisition of property by donee.

 

Inadequate Consideration:

if the difference of consideration and FMV is greater than Rs.50000/- than differential amount will be taxable for receiver and the treatment shall be the same as mentioned in (ii) above..

*Movable property means Shares and Securities, jewellery, Archaeological collection, Drawings, Paintings, Sculptures any work of art, bullion.  If any movable property other than above is gifted than there is no taxability.

**Property means Capital Assets in the hands of Receiver means if property is Stock in Trade, Raw Material & Consumable Stores for receiver than it will not taxable.

Immovable Property (Land, Building or Both):

Without Consideration:

(iii) if Stamp Duty value(SDV) is less than Rs.50000/- than nothing will be taxable.

For Donor: No Capital Gain because u/s 47(iii) it is not consider transfer.

For Donee:

  • 56(2)(vii) is not applicable.

  • COA will be previous owner Cost as per sec 49(1).

  • Holding period of previous owner period will be counted for donee.

(iv) if Stamp Duty value is more than Rs.50000/- :

For Donor: No Capital Gain because u/s 47(iii) it is not consider transfer.

For Donee:

  • SDV is income from other Sources u/s 56(2)(vii).

  • COA will be SDV.

  • Holding period will be counted from acquisition of property by donee.

Inadequate Consideration:

if the difference of consideration and SDV is greater than Rs.50000/- than difference amount will be taxable for receiver (Applicable from A.Y.14-15).

For Donor: Sec 50C will be applicable if Land & Building is capital Assets for Donor and Sale Consideration for Donor will be SDV. Capital Gain will be SDV – COA. Sec 43CA (From A.Y 2014-15) will be applicable if Land & Building is not a capital Assets for Donor and Sale Consideration for Donor will be SDV. Income from PGBP will be SDV – COA.

For Donee: Difference of SDV and Consideration is income from other Sources u/s 56(2)(vii).

At the time of further sale COA will be SDV and holding period will be counted from acquisition of property.

Exception: In below circumstances, gifts are not taxable even if value is greater than Rs.50000/-.

Gifts received:

i. From Relatives

ii. On the marriage of individual,

iii. By will or inheritance

iv. In contemplation of Death of payer

v. From local authority

vi. From Charitable Trust registered u/s 12AA

vii. From Any Trust, Foundation etc referred u/s 10(23c).

1 Relatives means

  • Spouse of Individual

  • Brother & Sister of Individual

  • Brother & Sister of Spouse of Individual

  • Brother & Sister of either of the parents of Individual

  • Any Lineal ascendants or descendants of the individual

Any Lineal ascendants or descendants of the spouse of the individual.

 

Below is a comprehensive list of Donors as per definition of relative under I.Tax Act ( Hindi connotation has also been mentioned)                                  

56(2)(viia): Receipt of shares by a firm or closely held Company.

Applicable if:

  1. Shares belong to a closely held company.

  2. Donor is any person.

Without Consideration: if Fair Market value is more than Rs.50000/-:

For Donor: No Capital Gain because u/s 47(iii) it is not consider transfer.

For Donee: FMV is income from other Sources u/s 56(2)(viia).

At the time of further sale COA will be FMV and for calculation of holding period previous owner period will be counted for donee.

Inadequate Consideration: if the difference of consideration and FMV is greater than Rs.50000/- than difference amount will be taxable for receiver.

For Donor: Capital Gain will be sale price – COA.

For Donee: Difference of FMV and Consideration is income from other Sources u/s 56(2)(viia). At the time of further sale COA will be FMV and holding period will be counted from the date of acquisition of Shares.

Exception: if Shares are received in nature of 47(via,47(vic),47(vicb),47(vid),47(vii) )(i.e. amalgamation ,merger, demerger. reorganisation etc.)

56(2)(viib): If Shares issued at premium in excess of FMV by a closely held Company

This applies to shares issued at a premium to resident person which is more than FMV. The difference of FMV and sale consideration will be taxable for a receiver i.e. closely held Company.

FMV of Shares will be higher of Value as calculated under rule 11UA or As calculated by Company to the satisfaction of A.O.

Exception:

  • If consideration is received by Venture Capital undertaking from Venture Capital Company or a Venture Capital Fund or

  • If consideration is received by a class of companies notified by Central Government.

VALUTION RULE: Movable or Immovable properties shall be valued as follows:

Immoveable Property:  SDV  of the property but if date of agreement for fixing the consideration and date of registration are not same than date of agreement will be considered for SDV (Applicable from A.Y.2014-15).

Movable Property: FMV will be as follows:

Jewellery, Archaeological collection, Drawings, Paintings, Sculptures any work of art, bullion:

a. Purchased from registered Dealer (under VAT):  invoice Value will be FMV.

b. In any Other Cases: Value of Property is less than Rs.50000/- than at which rate it can be sold in the open market will be FMV. And if value of property exceed Rs.50000/- than assessee has an option for FMV either it can be sold value or he can take report of registered valuer.

Quoted Shares and Securities:

a. If Transaction is done through RSE than transaction value recorded in stock exchange

b. If Transaction is not done through RSE than the lowest price quoted on any RSE in india for such share and securities as on the date of valuation and if transaction is not done on the valuation date  regarding such shares and securities than the lowest price will be taken immediately preceding the valuation date.

Unquoted or Unlisted Shares & Securities:

Unquoted Equity Shares:

Net worth * paid up value of one share
Total Amount of paid up equity sh. Capital

Net Worth: Assets – Liabilities.

Assets:

Include: Book Value of all Assets i.e. Fixed Assets, Current Assets, Investments. It does not include: Advance Tax, TDS & TCS, Dr Balance of P & L A/c, Miscellaneous Expenditure, and Discount on issue of Debenture not written off.

Liabilities:

Include: book value of all liabilities i.e. Preference Share Capital, Debenture, Loans (Secured & Unsecured),Current Liabilities ,Ascertained Provisions, Depreciation Reserve, Dividend on Equity & Preference Share (declared before Transfer),Current Provision for Income Tax-Advance Tax –TDS & TCS, Arrears of Divided on Preference Shares even if shown under contingent liabilities. It does not Include: Equity Share Capital, Provision for unascertained liabilities, Contingent Liabilities (except arrear of dividend of Pref. shares), Reserve & surplus Or

Value determined by merchant banker or accountant

Other Unquoted or Unlisted Shares & Securities: at which rate can be sold in market or a report from merchant banker or C.A.

Author
Usha Garg
usha@klaggarwal.com
www.klaggarwal.com


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