How Are Gifts Received From Parents Treated Under Income Tax?

In India, gifts received from parents are treated as tax-free under the Income Tax Act. The Act provides specific exemptions for gifts received from relatives, which include parents. As such, any gift received from a parent, regardless of the value, is exempt from tax and does not need to be reported as income.

Tax Treatment of Gifts Received From Parents:

Exemption Under the Income Tax Act:

Gifts received from parents are completely exempt from tax under Section 56(2) of the Income Tax Act, irrespective of the value of the gift.

The Income Tax Act defines parents as relatives, and gifts from relatives are not subject to gift tax or income tax.

Whether the gift is cash, property, jewelry, or any other asset, it remains tax-free.

No Upper Limit:

There is no upper limit on the value of gifts that can be received from parents. For example, a child can receive a gift worth ₹10,00,000 or ₹1 crore from their parents, and the gift will still be exempt from tax.

Since the exemption applies to both cash gifts and non-cash gifts (like property, jewelry, or shares), the recipient does not need to report it in their income tax return.

Reporting Requirements:

Gifts from parents do not need to be reported in the income tax return because they are exempt from tax. The recipient does not need to include these gifts in the section for Income from Other Sources.

However, it is a good practice to maintain documentation (such as a gift deed or transfer documents) for substantial gifts, especially when they involve property or large sums of money, to avoid future disputes.

Capital Gains Tax on Future Sale:

If the gift is a capital asset (such as property, shares, or land), it is exempt from tax at the time of receiving the gift. However, if the recipient later sells the gift (e.g., the property or shares), they may be liable to pay capital gains tax on the sale, depending on the nature of the asset, its holding period, and the profit made on the sale.

Gift of Property or Assets:

If a parent gifts property (land, house, etc.) to their child, it is considered tax-free at the time of receiving it. The fair market value of the property will be considered for tax purposes if the child later sells it.

If the child sells the gifted property, capital gains tax will apply, and the cost of acquisition will be calculated based on the parent's purchase price of the property.

Legal Actions and Protections:

• Gift Deed: While it is not mandatory, a gift deed is recommended for substantial gifts, especially for real estate or large sums of money, as it formalizes the gift and provides legal proof of the transfer.
• No Tax Filing for Gifts from Parents: Since gifts from parents are tax-free, there is no requirement to report them in the income tax return. However, for transparency and to avoid confusion, it is a good idea to maintain proof of the gift transaction.

Example:

Example 1: A child receives ₹5,00,000 in cash from their father. This gift is completely tax-free, and the child does not need to report it in their income tax return.

Example 2: A child receives a piece of land valued at ₹30,00,000 from their mother. This gift is exempt from tax, and the child does not need to pay any gift tax or include it in their income tax return. However, if the child later sells the land, they may be subject to capital gains tax based on the sale proceeds.

Conclusion:

In India, gifts received from parents are exempt from tax under the Income Tax Act. There is no upper limit on the value of the gift, and these gifts do not need to be reported in the recipient's income tax return. Whether the gift is in the form of cash, property, or other assets, it remains tax-free. However, if the recipient later sells a gifted property, they may be liable for capital gains tax on the sale. It's always a good practice to maintain documentation for large or valuable gifts to avoid potential disputes.