How Does Gifting Impact Wealth Tax in India?

In India, gifting can have significant implications on wealth tax, both for the donor (person giving the gift) and the recipient (person receiving the gift). While the Wealth Tax Act has been largely abolished as of 2015, there are still certain rules related to gifting that impact the taxable wealth of individuals. Moreover, gifts can have an indirect effect on other taxes like gift tax, income tax, or capital gains tax.

Steps to Understand Gifting and Wealth Tax

Wealth Tax Act Overview

Prior to 2015, India had a Wealth Tax Act, which imposed a tax on the net wealth of individuals. However, this Act was abolished, meaning there is no longer a direct wealth tax on individuals.

However, the net wealth of individuals still remains relevant for inheritance or gifts that can be subject to other taxes.

Gift Tax Implications

Gifts made to relatives (such as children, spouse, etc.) are generally exempt from tax under Section 56 of the Income Tax Act.

Gifts made to non-relatives may attract tax depending on the value and the nature of the gift. For example, if the gift exceeds ₹50,000, the recipient may be liable to pay income tax on the amount as Income from Other Sources.

The donor is generally not taxed for the act of giving a gift, but if the gift is in the form of an asset, it may have capital gains implications for the donor upon transfer of the asset.

Impact on Inheritance

If wealth is transferred through gifting, it may reduce the donor’s taxable wealth. However, if the donor passes away within 3 years of gifting the asset, the gifted wealth is included in the donor’s estate and taxed for inheritance purposes under the Estate Duty (if applicable).

Taxation on Assets Transferred as Gifts

If the gifted asset has appreciated in value, the donor may incur capital gains tax when the asset is sold.

If the recipient later sells the gifted asset, they may also incur capital gains tax based on the asset's fair market value at the time of receiving the gift.

Exemptions and Limits

Gifts from a relative (defined by the Income Tax Act) are exempt from tax. For example, gifts from parents to children or between spouses are not taxable.

Gifts exceeding ₹50,000 from non-relatives are taxed, and the tax is levied on the recipient.

Legal Actions and Protections

Ensure that the gift is documented properly through gift deeds or formal agreements to avoid any future legal issues.

If the gift involves real estate, it should be registered, and stamp duty may apply depending on the state laws.

Keep track of the fair market value of the gifted asset to determine future tax implications.

Example

If a person gifts ₹5 lakh in cash to their friend, and if the friend is a non-relative, the recipient will have to pay income tax on the amount exceeding ₹50,000 under the Income Tax Act. If the person gifts a piece of property to their child, no tax will be levied on the gift, but if the child sells the property in the future, they may have to pay capital gains tax based on the market value at the time of receiving the gift.