Gift is usually used to convert black money into white money. To stop practice of converting black money into white money a section 56(2)(Vii) introduced by Finance Act , 2009 and amended by Finance act , 2010. This section deals with law of taxation of gift.

Provision Contained in Sec-56(2)(Vii)-

Where an individual or HUF receives in any previous year, from any person or persons-

(a)  any  sum of money, without  consideration , the aggregate value of which exceeds Rs. 50,000/-, the whole of the aggregate value is taxable,

(b)  any immovable property,-

I.        without consideration, the stamp duty value of which exceeds Rs. 50,000/-, the stamp duty value of such property is taxable,

II.        received for a consideration which is less than the stamp duty value of the property and difference is more than Rs.50,000/- then such difference is taxable

(c)  any property other than immovable property,-

I.        without consideration , the aggregate fair market value of which exceeds Rs. 50,000/-, the whole of the aggregate fair market value is taxable,

II.        received for a consideration which is less than the aggregate fair market value of the property and difference is more than Rs.50,000/- then such difference is taxable

Analysis of Section- 56(2)(Vii) Read with section of Capital Gain Section 50C, Sec-47.     

I.        Any transfer of capital assets under gift, will or an irrevocable trust is not taxable under head Capital Gain. It is not regarded as transfer U/s 47.

II.        Any distribution of capital assets on the partial or total partition of a Hindu Undivided Family is not taxable under head Capital Gain. Because it is not regarded as transfer U/s 47.

III.        As per Sec-50C, where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed or assessable by any authority of State Government for the purpose of payment of stamp duty, such value deemed as full consideration.

Graphical representation of above provisions ( like a capsul to understand above provisions

Example of above discussed provisions :-

1. Lucky has a property, which he has purchased on 01-04-2004 of Rs. 10,00,000/-. Later on he gifted the property to Bharti (Donee) on 31-03-2015. On date of gift Stamp duty/Fair market value of said property was Rs. 25,00,000/-.What is tax implication in the hands of Lucky (Donor) and Bharti (Donee).?

Solution-

In the hands of Lucky (Donor)

There is no capital gain tax in the hands of lucky because gift transfer is exempted U/s 47 of the income tax act and other reason is that there is no sale price exist.

In the hands of Bharti (Donee)

Gift is taxable in the hands of Bharti under the head “Income from other sources” under section 56(2)(Vii). Because stamp duty value/ Fair market value of the property is in excess of Rs. 50,000/-. Hence whole stamp duty value/ Fair market value is taxable in the hand of Bharti.i.e 25,00,000/- is taxable.

2. In above example if Lucky sold property to Bharti at Rs. 20,00,000/-. Other things remains same then what tax implication in the hands of Lucky and Bharti.?

Solution-

In the hands of Lucky

If property sold is an immovable property then Section 50C would be applicable, hence Capital Gain = 25 lakh-10 lakh= 15 lakh is taxable.( Subject to indexation)

If property is other than immovable property then section 50C does not apply, hence Capital gain = 20 lakh- 10 lakh .i.e 10 lakh is taxable.

In the hands of Bharti-

Stamp Duty value or fair market value of the property is excess of Rs. 50,000/-. Consideration paid is less than stamp duty value/ fair market value and difference between stamp duty value/ fair market value is in excess of Rs. 50,000/-. Hence it is taxable in the hands of Bharti.

Taxable amount = 25 lakh – 20 lakh = 5 lakh is taxable under the head “Income from other Sources”

Exemptions in relation to Gift

Provided further that Sec-56(2)(Vii) does not apply to any sum of money or any property received-

I.        From any relatives, or

II.        On the occasion of the marriage of the individual, or

III.        Under a will or by way of inheritance, or

IV.        From any local authority as defined in the explanation of Sec-10(20), or

V.        From any fund or foundation or university or other educational institutions ,or hospital or other medical institutions or any trust referred in Sec-10(23C) ,or

VI.        From any trust or institutions registered under section 12AA of income tax act.

I have used the word “Property” many times. Property means the followings capital assets of the assessee, namely:-

i.        Immovable property being land or building or both,

ii.        Shares and securities

iii.        Jewellery

iv.        Archaeological collection,

v.        Drawings,

vi.        Paintings,

vii.        Sculptures,

viii.        Any work of art,

ix.        Bullion.

Meaning of Relative(Specified persons):-

i.        Spouse of individuals,

ii.        Brother or sister of individual,

iii.        Brother or sister of the spouse of the individual,

iv.        Brother or sister of either of the parents of the individual,

v.        Any lineal ascendant or descendant of the individual,

vi.        Any lineal ascendant or descendant of the spouse of the individual,

vii.        Spouse of the person referred to in above clauses.

Section 56(2)(Viia) :- Gift received by firm or closely held company:-

Where a firm or closely held company received from any person or persons shares of a closely held company –

a) Without consideration, the aggregate fair market value of which exceeds Rs. 50,000/-, the whole of the FMV of such shares.

b) For a consideration which is less than FMV of shares and difference between consideration or FMV exceeds Rs. 50,000/- , then such excess shall be taxable.

Points need to be remember :-

1)    Gift received from relative is exempt.

2)    Gift received on the occasion other than marriage from non specified person shall be taxable under the head income from other sources.

3)    Money received whether in cash or cheque in excess of Rs. 50,000/- from non specified persons shall be taxable.

4)    Gift received in contemplation of death is not taxable.

5)    There is no tax implication if HUF receives gift from any member of the HUF or purchase assets at lower price than stamp duty value/ Fair market value.

6)    As per Hindu law HUF can not make gift to any one . Such gift is void ab initio.

( Author is a CA Student and can be reached at E-Mail-: lakeshkr@gmail.com)

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