Taxation of Gifts
Gift tax in India
has ceased to apply with effect from gifts made on or after 01-10-1998 or
after.
Before Oct. 1998 gifts has been taxed in India under gift
tax act 1958 it covers all transactions made with the name of gifts.
The Act defines “Gift” means the transfer by person to
another of any existing movable or immovable property made voluntarily and
without consideration in money or money’s worth or short consideration.
Although this act has been ceased to apply but the definition
of gift is still valid. Now gifts are taxed under section 56 (v), (vi), (vii), (viia),
(viib), (viii) income from other sources, this section has wide coverage of
transactions which made without consideration or less/ short consideration.
We will discuss one by one all clause of section 56
enumerated above.
Sec 56(v),(vi)& (vii)
It States that any amount exceeding Rs.50, 000 received from a person other than a relative or at the
time of marriage or under a will or by way of inheritance or from local authority
or any scholarship from any institution, trust registered under section 12AA or
section 10(23C) shall be chargeable under the
head income from other source and added to the total income of recipient
In other words if a person (individual or HUF) receives more than 50,000 from a non relative
it will be added to total taxable income of such person and taxed at such rates
applicable. Provided that it’s not given at the occasion of marriage of
recipient, or not received under a will or by way of inheritance.
Let’s see if Mr. A receives Rs. 60, 0000 under different
situation what will be impact on the total income.
Situation Taxed
1. Received
from Relative No
2. Received
from non relative on B’day Yes
3. Received
from Trust/ institution
registered U/s 10 (23C) or 12AA No
4. On the
occasion of marriage No
5. Received
under will No
6. By
inheritance as a legal heir
No
7. by a
member of HUF to HUF No
8. by HUF to
its member
Yes
For the last illustration we can see that it is very clear
from the definition of relative that refer note 2 that HUF is not a relative of
its member hence the gift received by its member from HUF is added in his total
taxable income and taxed at the prevailing rates.
But an HUF can receive gifts from its member.
Incase of any movable or immovable property received by a
person (individual / HUF) who is not a relative and who does not inherited via
a will with or without adequate consideration shall be added under the head Income from Other Sources and
calculated as below.
Incase of
Any immovable property
Consideration
Condition Tax
Treatment
Without/Nil
stamp duty value
of stamp duty value of
which exceeds Rs. 50,000 such property
Illustration
Ms. A received a farm
house from Mr. A as alimony, what will be tax impact on Ms. A’s total income of
that year?
Ans: As this is in lieu of discharge of legal agreement, the
farm house received by Ms. A is not taxable and not added to the Taxable income
of Ms. A.
What if Ms. A
receives this farm house from her father?
Ans: Still not
added to income of Ms. A as father is relative of Ms. A
Mr. A and Ms. A is
engaged, Mr A gifted Ms. A a bungalow what will be tax implications?
Ans: Stamp duty value of such property will be added to
income of Ms. A under the head Income from other sources. As the moment of gift
Mr. A and Ms. A are not falls in the definition of relative.
Any property other than immovable then
Consideration
Condition Tax
Treatment
Without/Nil Aggregate FMV FMV of such
exceeds Rs. 50 000 Property
Less than Aggregate Aggregate FMV Excess of FMV
FMV of the property exceeds Rs. 50 000 and
consideration
Paid
Illustration
Mr. A received a painting of Mr. M.F.Husain on the occasion
of his marriage from a friend?
Not added to his
income.
Mr. B Sold jewellery costs Rs. 10 lakh FMV 12 lakh to Mr. A
at discounted price of Rs. 2 lakh, Mr. A and Mr. are childhood friends.
Difference of consideration paid and FMV added to total
income of Mr. A under the head Income from other sources and taxed at the
prevailing rates i.e. Rs. 10lakh taxed at the hands of Mr.A
Sec 56 (viia)
It states that when a closely held company receives from
person/s shares of another closely held company the value in property shall be
charged under the head Income from other
sources and calculated as given below.
Consideration Condition Tax
Treatment
Without/Nil Aggregate
FMV
FMV of such
exceeds Rs. 50 000 Property
Less than Aggregate Aggregate FMV Excess of FMV
FMV of the property exceeds Rs. 50 000 and
consideration
Paid
Fair market value of shares of closely held company
determine through rule 11U and 11UA as amended by CBDT.
Sec 56 (viib)
This clause is added by finance act 2012 and it is
applicable w.e.f April 1st 2013. It states that where any closely
held company receives any money in excess of fair market value of shares in on
acquisition of shares from a resident then
excess amount received shall be chargeable to tax under the head Income from other source but exclude venture capital
fund/company and any other company or class of company notified by central
government.
Or in other words share premium received by closely held
company from resident shall be added to its income.
Illustration
(1). A ltd is a closely held company where the
promoters and directors are hold 100 % share capital and it is operating in
yarn manufacture. A ltd reported its EPS Rs. 20 p.s, net worth of company is
100 lakh, having share capital of 100,000 shares in last financial year. A ltd
is planning to expend its operations in another sector that is fabric
manufacturing. They increased their capital base by issuing shares their
friends who are non resident Indians. Total no of new shares issued to Mr. E
and Mr. F are 20,000 @ Rs. 400 per
share in equal proportion.
Q. (1) Do the premium received from Mr. E & F is taxable
in the hand of company?
Q. (2) what will be the implications if Mr. E is a resident
where as Mr. F is non resident.
Q. (3) what will be implication if both are resident.
Ans: (1) No, Not
added to the income of A ltd. as the clause 56(viib) is only applicable to
resident assessee.
Ans: (2) Premium
receipt from Mr. will be added while calculation total income where as Premium
received from Mr. F is non taxable capital receipt.
Ans: (3) Premium
received from both Mr. E & F will be added in total income of A ltd.
Fair market value of shares of closely held company
determines either by (a) book value as per balance sheet or (b) based on
discounted cash flow method as per rule 11U. Rule 11U and 11UA amended by
notification dated 29 November 2012.
Book value as per balance sheet
FMV = (book
value of assets less book value of liabilities) × paid-up value of
equity Paid up equity share capital
appearing in books shares to be issued
In terms of the amendment, it is now stated that for the
purpose of above formula the book value of assets would include only those
items that actually represents the value of any asset. Thus, items appearing on
the asset side of
balance sheet such as taxes paid by way of
deduction/collection of tax or advance tax (as reduced by any tax claimed as
refund) or amount shown as the unamortised amount of any deferred expenditure
would not be included while calculating the book value of asset.
Similarly, for the purpose of above formula, the book value of
liabilities would exclude the amount of provision for taxation which is in
excess of tax payable on book profits (other than any tax paid as
deduction/collection or advance tax as reduced by claim of refund under the
Act)
Discounted cash flow
In cases where shares are issued by a closely held company
to a resident at a premium, the taxpayer has an option to calculate the FMV by
using the above formula or the DCF method. The DCF method of valuation is
required to be carried out by a merchant banker or a chartered accountant
(fellow member of the Institute of Chartered Accountants of India) other than
the person who is conducting the tax audit or the statutory audit of such
company.
Summary
As per the above discussion it is evident that gifts are
taxable in the hands of recipient not in the hands of donor. But if Donor and
donee are related i.e. relative to each other and falls under the definition of
relative it is not taxable in the hands of donee as well. But there are other
sections which can be applicable like wise rules of clubbing will made
applicable on such transfers/gifts. And in other cases capital gain taxes are
there.
Notes
Note1: the amount
of Rs. 50,000 was increased from April 1st 2006 via clause (vi)
before that it is Rs. 25,000 in clause (v)
Note 2: For the
purpose of clause (v) & (vi) relative means-
(i)
Spouse of the individual ( Husband/wife )
(ii)
Brother or sister of individual (Brother/s/ sister/s)
(iii)
Brother or sister of spouse of individual (in laws)
(iv)
Brother or sister of either parents of individual
(Maternal uncle’s/Aunts or Paternal uncle’s/ Aunts)
(v)
Any lineal ascendant or descendant of the individual (Grand
parents or children or grand children)
(vi)
Spouse of person referred (ii) to (v)
(vii)
In case of HUF any member thereof
Note 3: By
finance act, 2009(2) clause (vii)
has been inserted, part (a) contains the text of clause (vi) and (b) & (c)
which added immovable property as well.
Note 4: property
means the following capital assets hold by assessee-
(i)
immovable property being land and building or both
(ii)
shares or securities
(iii)
jewellery
(iv)
archaeological collections
(v)
drawings
(vi)
paintings
(vii)
sculptures
(viii)
any work of art
(ix)
bullion
Note 5: for
clause (viia) a proviso is provided, which says that this clause will not apply
to those transactions which are not considered transfer under section 47
Note 6: clause
(viib) was inserted via finance act 2012 and main target of this clause are
closely held companies to “Prevent Generation and Circulation of Unaccounted
Money”. Companies were issuing shares at a substantial premium to convert the
unaccounted money without providing any valuation justifying the premium. The
amendment covers such unjustified premium and the excess is being taxed as
income of the company
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