Gifting Money To Family: When It’s Tax-Free And When It Can Trigger Notices

Receiving gifts is exciting. Everyone loves to receive gifts from their family members and friends. Sometimes, however, gifts come with tax implications too. Earlier, we used to receive gifts only on important occasions, like on some special day or on someone’s wedding, etc. However, gifts are now also used as a tax-planning tool.

A large number of people believe that gifts received out of love and affection are exempt from tax. However, this isn’t the case. The Income Tax Act requires people to pay taxes on gifts, too, except when these gifts meet the specific requirements for exemption.

Prashant Bhojwani, Partner, Corporate Tax, Tax & Regulatory Advisory, BDO India, says that in India, gifting within families is a long‑standing tradition (on account of natural love and care). “Often, gifting is used to support financial needs for education, weddings, etc. The income-tax law, however, provides specific guidance on the tax treatment of gifts. For instance, gifts from relatives are not taxable, irrespective of the quantum,” he says.

Gifts received on the occasion of marriage are also exempt, irrespective of the quantum or relationship with the donor. It is, however, advisable to maintain the records of such gifts, such as the name of the donor, nature of the gift, value, mode of receipt, etc.

“Further, any gift received under a Will, or by way of inheritance, or in contemplation of the death of the payer or donor, would also be considered non-taxable,” says Bhojwani.

Importantly, the definition of a relative is to be read from the donor’s perspective. A relative means a husband, wife, brother, sister, lineal ascendants (maternal or paternal) or descendants. Lineal ascendants would imply parents, grandparents, etc, while descendants would cover children, grandchildren, etc.

It is also worth noting that monetary gifts in general from other than relatives, up to Rs 50,000 in aggregate in a financial year, are not taxable. “If the gift amount exceeds this threshold, the entire amount is taxable in the hands of the donee or recipient as 'Income from Other Sources,” as per normal tax slabs,” says Bhojwani.

Under the Indian Income Tax Act, thus, “gifts received from specified relatives such as parents, siblings, or spouses are fully exempt from tax, regardless of their value. Gifts received on special occasions, like marriage or through inheritance, are also not taxable. However, gifts from non-relatives become taxable if their aggregate value exceeds Rs 50,000 in a financial year,” says Neeraj Agarwala, Partner, Nangia & Co LLP.

Despite these clear exemptions, confusion often arises because the Income Tax Return (ITR) forms do not provide a dedicated section for reporting such exempt income. “As a result, when high-value transactions such as significant money transfers or property gifts are flagged by banks or financial institutions, the Income Tax Department may face difficulty reconciling them with the information disclosed in the ITR. This mismatch can lead to the issuance of notices seeking verification of the nature and source of these transactions,” informs Agarwala.

High‑value gifts may attract scrutiny by the tax department, and in this context, tax authorities typically examine the donor’s relationship for gifts from relatives. In other cases, examination could include the financial capacity of the donor, mapping reported income/ assets and lifestyle indicators, etc.

To avoid unnecessary scrutiny, taxpayers should compile and maintain all relevant documentation, including gift deeds or declarations signed by the donor, specifying the relationship between the donor and donee; bank statements evidencing the transfer; and proof of relationship with the donor, such as birth and marriage certificates, among others.