How Do the Provisions of Section 56(2) of the Income Tax Act Apply to Gifts?

Section 56(2) of the Income Tax Act, 1961 deals with the taxability of gifts received by an individual. The section specifies the conditions under which gifts received by an individual are considered taxable income. It also outlines the exemptions for gifts received from close relatives and specifies when gifts from non-relatives are taxable. The provisions of Section 56(2) are crucial in determining the tax liability of the recipient when they receive gifts, especially when the value of the gift exceeds a specified threshold.

Key Provisions of Section 56(2) of the Income Tax Act:

Taxability of Gifts from Non-Relatives:

Section 56(2)(vii) states that if an individual receives a gift from a non-relative and the value of the gift exceeds Rs. 50,000 in a year, the entire amount of the gift will be taxable as income in the hands of the recipient.

This provision applies to cash gifts, movable property (like jewelry), or immovable property (like land or house).

For example, if a person receives Rs. 1,00,000 from a friend (non-relative), the entire Rs. 1,00,000 will be considered taxable income.

Exemption for Gifts from Close Relatives:

Gifts received from close relatives are exempt from tax under Section 56(2)(vii).

Close relatives include parents, siblings, spouse, children, in-laws, and others as specified under the Income Tax Act.

There is no limit on the value of the gift received from close relatives. Such gifts are not taxable, regardless of the amount.

For example, if a person receives Rs. 5,00,000 from their parent, this amount is tax-free under Section 56(2).

Taxability of Gifts in the Form of Property:

If the gift is in the form of immovable property (such as land or a house), the fair market value of the property is considered when determining whether the gift exceeds Rs. 50,000.

If the fair market value of the gifted property exceeds Rs. 50,000, it becomes taxable as income, even if the property is received from a non-relative.

For example, if an individual receives a house worth Rs. 1 crore as a gift from a non-relative, the entire value of the house is taxable.

Special Provisions for Gifts on Occasions:

Gifts received on certain occasions, like marriage, are exempt from tax under Section 56(2). The value of the gift does not matter in such cases, and the gift is not considered taxable income, regardless of the amount.

For example, if a person receives Rs. 10 lakh as a wedding gift from a friend (non-relative), the amount is exempt from tax under Section 56(2) because it was received during the occasion of marriage.

Gifts Received in the Form of Shares:

Gifts received in the form of shares or securities also come under the purview of Section 56(2) if the value of the gift exceeds Rs. 50,000. The recipient will be liable to pay tax on the market value of the shares or securities.

The market value is determined based on the price on the stock exchange or, if not listed, based on the fair market value as per the rules laid down by the tax authorities.

Taxation Mechanism Under Section 56(2):

Threshold Limit:

If the total value of the gift received from non-relatives exceeds Rs. 50,000 in a year, it becomes taxable as income.

However, gifts from close relatives are not taxed, no matter how large the amount is.

Income Tax Slabs:

The taxable gift will be added to the total income of the recipient and taxed according to the applicable income tax slab.

The recipient will pay tax on the total value of the gift received, based on their total income for the year.

Gift Reporting in Tax Return:

Individuals must report taxable gifts in their income tax return.

Failure to report taxable gifts may lead to penalties for concealment of income.

Example:

Gift from a Non-Relative Exceeding Rs. 50,000:

A person receives Rs. 60,000 as a gift from a friend (non-relative). Since the gift exceeds Rs. 50,000, the entire amount of Rs. 60,000 will be taxable under Section 56(2) as income in the hands of the recipient.

Gift from a Close Relative:

A person receives Rs. 2,00,000 as a gift from their mother. Since the mother is a close relative, this gift is tax-free, and the recipient is not required to report it as taxable income.

Property Gifted by a Non-Relative:

An individual receives a house worth Rs. 1 crore from a non-relative. Since the value of the gift exceeds Rs. 50,000, the entire Rs. 1 crore will be taxed as income under Section 56(2), based on the fair market value of the house.

Conclusion:

Section 56(2) of the Income Tax Act plays a significant role in determining whether a gift is taxable. Gifts received from non-relatives exceeding Rs. 50,000 are considered taxable income. However, gifts from close relatives are exempt from tax, irrespective of their value. It is important for recipients of taxable gifts to report them in their income tax return and pay tax accordingly to avoid penalties or interest.