Income Tax Department May Flag You For Not Declaring Gifts

If not disclosed properly in your Income Tax Return, taxable gifts may come under scrutiny by the Income Tax Department. You won't have to pay any income tax on gifts you get from a relative. When it comes to taxes, "relative" means your closest family: your spouse, parents, brothers and sisters, children, in-laws, grandparents, grandchildren, and your uncles or aunts.

Now, if you receive money as a gift, like cash, a cheque, or a bank draft, it's generally tax-free, if all the money you receive in a year adds up to Rs 50,000 or less. But here's the catch: if the total value goes even a little bit over Rs 50,000, then the entire amount becomes taxable, not just the part that's over the limit. Just to note, gifts from cousins or your siblings' children can be taxed if their total value goes over Rs 50,000.

The Income-tax Act, 1961 (IT Act) provides for tax on "gifts" under the head of “Income from Other Sources". “While the said provisions of the IT Act (i.e., Section 56(2)(x)) govern the taxation of gifts exceeding specified limits, it also ensures to carve out exemptions, such as gifts received under a will or by way of inheritance, from relatives, or on certain specified circumstances. For instance, if an individual receives gifts on the occasion of his own marriage, such gifts are fully exempted from the ambit of taxation,” says Kunal Savani, partner, Cyril Amarchand Mangaldas. Make sure to put those gifts on Schedule OS.

It is important to emphasize that the above-mentioned provision tends to tax the receipt of such gifts, which are not exempt from taxation, in the hands of the receiver, subject to certain conditions as provided in the IT Act.

“A taxpayer has to factor in the conditions and the monetary limits as provided in the provisions of the IT Act to ensure that such receipts of gifts are not taxable,” says Savani.

Do not assume that all family members are your relatives. For example, under tax rules, cousins are not relatives. Also, avoid splitting gifts across accounts to stay below the Rs 50,000 threshold. Never report taxable gifts under exempt income.

You should also keep documentation like bank records in case of any scrutiny. Also, exempt gifts should be mentioned under "Exempt Income" (EI) in Schedule EI to maintain transparency.