Gift from a blood relative is exempt under Section 56(2)

A gift from a blood relative is exempt u/s 56(2) of the Income Tax Act, 1961

What is a ‘Gift’ under the Income Tax Act?

Under the Income Tax Act, a “Gift” refers to any money, immovable property, or movable property received by an individual from another person or organization without any consideration in return. In other words, the recipient does not have to give anything in exchange for acquiring the gift.

Gifts are categorized into Following types:

From a taxation perspective, gifts are categorized into three main types:

• Monetary Gifts: These include money received in the form of cash, cheques, drafts, or bank transfers. Any amount received in these forms may be considered a gift for tax purposes.
• Movable Property Gifts: These refer to tangible items such as shares, bonds, jewellery, paintings, sculptures, and other valuable assets. If a movable property is received at a price lower than its fair market value, the difference between the fair market value and the price paid is treated as a gift.
• Immovable Property Gifts: This includes land, buildings, and residential or commercial properties. If an immovable property is received at a price lower than its stamp duty value, the difference between the fair market value and the price paid is considered a taxable gift.
• Gift Tax Exemptions in India: Gifts are taxable if the total value exceeds ₹50,000 in a financial year. However, certain exemptions apply in specific circumstances, such as gifts from close relatives or gifts received on special occasions like weddings or inheritances.

• Exemptions from Gift Tax:

• • Gifts up to ₹50,000: Gifts received up to ₹50,000 in a financial year are tax-free. If the total value exceeds this limit, the entire amount becomes taxable.
  • Property Received for Inadequate Consideration: If a property is received at a price significantly lower than its stamp duty value, the difference is taxable as a gift. However, if the difference is less than ₹50,000, no tax is applicable.
  • In case income is generated from these gifts (e.g., interest earned on gifted money), it may be taxable under the clubbing provisions of the Income Tax Act.

• • Wedding Gifts: Gifts received by a newlywed couple from immediate family members or others on the occasion of their marriage are tax-exempt. This includes cash, jewellery, property, stocks, or gold.
  • Gifts by Inheritance or Will: Gifts received through inheritance or a will are fully exempt from gift tax.
  • Gifts from Local Authorities and Charitable Trusts: Money received from local authorities, charitable trusts, foundations, universities, or registered charitable organizations is tax-exempt. This includes scholarships or financial aid given to students or patients under medical care.
  • Money Received in Contemplation of Death: If money is received in anticipation of a person’s death (akin to inheritance), it is exempt from tax.

Gifts from Relatives (Exempt from Tax):

Gift from a blood relative is exempt under Section 56(2) of the Income Tax Act, 1961. Gifts received from the following relatives are exempt from tax, Who qualifies as a blood relative (exempt category): Parents, children, spouse, siblings, grandparents, and in-laws.

• Spouse
• Brother or sister (of the individual or spouse)
• Brother or sister of either parent
• Lineal ascendants or descendants (parents, grandparents, children, grandchildren)
• Spouse of any of the above-mentioned relatives

If received from a non-relative : Gifts exceeding ₹50,000 in a financial year from non-relatives are fully taxable under “Income from Other Sources.

Other Exempt Gifts:

• • Wedding gifts.
  • Gifts received through inheritance or will.
  • Gifts from local authorities, trusts, or educational institutions

How to Declare Gift received is Taxable in ITR

How to gift transfer funds from a blood relative in ITR?

1. Choose the Correct ITR Form

• • ITR-1 (Sahaj): If you have only salary/pension income, one house property, and other sources income (excluding business/professional income).
  • ITR-2: If you have capital gains or multiple house properties.
  • ITR-3/ITR-4: If you have business or professional income.

2. Report It in the Exempt Income Section

• • For ITR-1 & ITR-2:
    • Navigate to the “Exempt Income (for reporting purposes)” section.
    • Select “Others” from the dropdown.
    • Enter the amount and mention “Gift from relative – exempt under Section 56(2)”.
  • For ITR-3 & ITR-4:
    • Report it under Schedule EI (Exempt Income).
    • Mention “Gift received from relative – exempt u/s 56(2)”.

3. Compute Tax Liability

• Gift tax is applicable to the recipient of the gift, and it must be declared in their Income Tax Return (ITR). If the gift is taxable, report it under “Income from Other Sources” in your ITR form. If exempt, it is advisable to mention it in the Exempt Income Schedule to avoid scrutiny. The taxable gift amount is added to your total income for the year. It is taxed as per your applicable income tax slab rates. The tax on the gift must be paid along with your total income tax liability before the due date of filing the ITR.

• If advance tax provisions apply, you may need to pay tax in installments during the year.

• Taxpayers must report Gift transaction properly in your ITR. Income taxpayer Keep a record of the online transfer details including Bank Statement. Gift Deed (Optional but Recommended) and A simple declaration stating that the amount is a gift with no repayment obligation. He must take PAN Details of the Relative, which helpful in case of IT Department scrutiny. Would you like help with drafting a simple gift deed format for this purpose?

Practical Life Gifts example

Facts of the case : Land situated in Haridwar. Gift deed executed in favour of wife, but not valid as per local registry rules (not registered/recognized). Sale deed/registry of property was done in husband’s name (since property legally stood in his name). Sale proceeds credited into joint account of husband and wife. in this case No TDS deducted as consideration < INR 50 lakh. & Client wishes to show the transaction in wife’s name and pay taxes in her return.

Responses as per Legal Position :

Ownership under the Transfer of Property Act/Registration Act : For a gift of immovable property to be valid, it must be executed through a registered gift deed (Sec. 123, Transfer of Property Act). If the registry office did not accept/allow the gift, then ownership never transferred. The property continued in the husband’s name.

Income-tax implications : The seller of the property is the legal owner (husband). Hence, capital gains are taxable in the husband’s hands. Even if the wife pays the tax voluntarily, it will not cure the defect. The IT Department will see the registered sale deed, which clearly shows the husband as the transferor.

Clubbing Provisions (Section 64 of the Income Tax Act) : Even if the gift deed were valid, any income (including capital gains) arising from an asset transferred to spouse without adequate consideration is clubbable with the transferor’s income. Therefore, capital gains would still be taxable in the husband’s hands, not the wife’s.

Our opinion :

The tax liability is on the husband, since the gift deed is not legally valid (no change in ownership). The sale deed is registered in the husband’s name. Section 64 applies even if the gift was considered valid. Funds credited to the joint account do not change the legal incidence of tax. Therefore, the correct course is to report the capital gains in the husband’s ITR and pay tax accordingly. Recording it in the wife’s name will not stand legally and could invite mismatch scrutiny from the Income Tax Department.