For the explicit purpose of entreating you to refrain from gifts, allow me to narrate a real-time episode.
In 1989, a Mrs. Mehta dragged her husband to our consultancy table. Mr. Mehta was the proud owner of a portfolio worth Rs 53 lakh in shares, earning an income of Rs 1.63 lakh. He resorted to all the then available tax-saving devices, which required Rs 1 lakh and succeeded in bringing down the income tax to about Rs 20,000. But he had to pay about Rs 64,000 wealth tax. He had a rightful grouse. He was earning Rs 1.63 lakh and required Rs 1.84 lakh for the taxes and tax saving devices. We advised them to disinvest shares and buy the then available tax-free RBI Relief Bonds. These would give them a tax-free income of over Rs 4.50 lakh. We also advised Mr. Mehta to give a gift through these bonds to his wife of Rs 5 lakh. This was the limit up to which these bonds were free from gift tax. It was a happy couple that left my table.
Much later, we learnt that Mrs. Mehta had eloped with a friend of Mr. Mehta. Mr. Mehta lost money, wife and a friend. Moreover, we lost a good client. Bad!
Gift Has Become Income
U/s 56(x), aggregate amount of gifts received by an individual or HUF in the form of some specified assets without consideration or for inadequate consideration, are taxable, unless the aggregate amount is Rs 50,000 or less. Otherwise the whole of such sum is taxable under the head Income from Other Sources.
These assets are —
- Land and building
- Shares and securities. This includes transactions undertaken in shares of a company (not being a company in which public are substantially interested) where the recipient is a firm or a company. Sec. 2(18) provides the definition of a company in which the public are substantially interested. Sec. 2(24) includes the value of such shares in the definition of income. Finally Sec. 49 states that the cost of acquisition of such shares will be the value which has been taken into account and has been subjected to tax u/s 56(2).
- Archaeological collections
- Drawings, paintings, sculptures or any work of art
All this shall not apply to any above specified assets received —
- from any relative; or
- on the occasion of the marriage of the individual; or
- under a will or by way of inheritance; or
- in contemplation of death of the payer; or
- from any local authority; or
- from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in Sec. 10(23); or
- from any charitable trust or institution registered u/s 12A or 12AA.
- from an individual by a trust created or established solely for the benefit of relative of the individual. Here relative means:
- spouse of the individual;
- brother or sister of the individual;
- brother or sister of spouse of the individual;
- brother or sister of either parents of the individual;
- any lineal ascendant or descendant of the individual;
- any lineal ascendant or descendant of the spouse of the individual;
- spouse of the persons referred in clauses (ii) to (vi).
This definition results in a strange aspect. For instance, your father’s brother is your relative. However, you are his brother’s son and therefore you are not his relative. In other words, you can receive a gift from him but you cannot receive any gift from him.
The authors A.N. Shanbhag and Sandeep Shanbhag are financial advisors and can be reached at firstname.lastname@example.org