How Does The Income Tax Act Define A ‘Relative’ For Gift Tax Purposes?

Under the Income Tax Act of India, the term ‘relative’ plays a crucial role in determining whether gifts received from a person are exempt from gift tax. Gifts received from relatives are generally exempt from tax, and understanding who qualifies as a 'relative' for these purposes helps in identifying which gifts are tax-free and which may be subject to tax.

Definition of ‘Relative’ for Gift Tax Purposes:

The Income Tax Act defines a ‘relative’ for gift tax purposes in a broad manner, including several family relationships. These relationships are important because gifts received from any of these relatives are exempt from gift tax, regardless of the amount.

• Spouse: The husband or wife of an individual is considered a relative under the Income Tax Act. Gifts received from a spouse are exempt from gift tax.
• Parents: Both the mother and the father are considered relatives. Gifts received from one’s parents are exempt from tax, regardless of the value.
• Children: Sons, daughters, and stepchildren (children from a step-parent) are also considered relatives. Gifts received from children are exempt from gift tax.
• Siblings: Brothers and sisters (both full siblings and half-siblings) are considered relatives. Gifts received from them are exempt from gift tax.
• Grandparents: Both maternal grandparents and paternal grandparents are considered relatives. Gifts from grandparents are exempt from gift tax.
• Lineal Ascendants and Descendants: The Act includes lineal ascendants (such as great-grandparents, grandparents, and parents) and lineal descendants (such as children, grandchildren, and great-grandchildren) as relatives. Gifts from these family members are exempt from tax.
• Other Relatives as Defined by the Act: In addition to the immediate family members, the term ‘relative’ can also include other persons as defined under the Income Tax Act, such as:
  • Uncles and aunts
  • Nephews and nieces (in some cases, depending on the relationship)

Important Notes:

• Gift Tax Exemption: Gifts from relatives are exempt from gift tax, regardless of the value of the gift. This means there is no upper limit on the amount that can be gifted by a relative without incurring tax.
• No Tax Liability on Gifts from Relatives: When an individual receives a gift from a relative, it is not included in their taxable income, and they are not required to report it in their income tax return.
• Non-Relative Gifts: Gifts from non-relatives exceeding ₹50,000 in a financial year are subject to tax. These gifts must be reported under Income from Other Sources in the recipient's tax return.

Legal Actions and Protections:

Gift Deed: It is advisable to execute a gift deed for high-value gifts received from relatives to ensure the transfer of ownership is legally recognized and properly documented.

Documentation: Even though gifts from relatives are exempt from tax, maintaining proper documentation (e.g., gift deeds or transfer documents) can help prevent any future disputes or issues.

Example:

Example 1: If an individual receives a gift of ₹5,00,000 in cash from their brother (a relative), this gift is exempt from gift tax, as it falls under the category of a gift from a sibling.

Example 2: If a person receives a plot of land from their father (a relative), the gift is exempt from gift tax, regardless of the value, because it is received from a parent, which is a qualifying relationship under the Act.

Conclusion:

In India, gifts received from relatives as defined under the Income Tax Act are exempt from gift tax. The law recognizes a wide range of family relationships, ensuring that gifts exchanged within families are not subject to tax. Understanding the definition of a ‘relative’ is important to ensure that individuals comply with the tax provisions and can benefit from these exemptions.