Gifts from specified relatives are fully tax-free, but those received from others become taxable if the value exceeds Rs 50,000.
The person giving the gift does not pay any tax; the real tax event arises only when the recipient eventually sells the asset.
For capital gains, the recipient inherits the original purchase cost of the giver, not the market value at the time of the gift.
The holding period is also carried forward from the original owner, which determines whether the gains are taxed as long-term or short-term.
Think Gifts Are Tax-Free? Wait Until You Sell
A gift may not trigger tax today - but it can create a hidden liability later. When the asset is sold, the taxman looks back to the original purchase price.
Summary
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Gifting an asset to a family member feels like a clean, tax-free move. At the moment of the asset transfer, this perception is largely accurate. What most people do not realise is that the tax story does not end here; for the recipient, it’s just getting started.
Who Pays Tax On The Gift?
Under Section 56(2)(x) of the Income Tax Act, gifts received from specified relatives, i.e., spouse, children, parents, siblings, and their spouses, are fully exempt regardless of value. Outside this circle, any gift exceeding Rs 50,000 in value is taxable in the recipient's hands at slab rates under ‘Income from Other Sources.’
One misconception worth correcting: the giver pays nothing. The Gift Tax Act was abolished long ago. A gift is excluded from the definition of a ‘transfer’ under Section 47 (iii). Therefore, no capital gains tax arises for the giver at the time of transfer.
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Where Does The Real Liability Live?
“When the recipient sells the gifted asset, the cost of acquisition for computing capital gains is not zero. Under Section 49(1), it is the price the original owner paid, not the market value on the date of the gift. The holding period (to identify long or short-term) also runs from the date the original owner first acquired the asset,” says CA Parag Jain, Tax Head at 1 Finance.
Take a straightforward case. Vikas bought shares at Rs 10 each. They appreciated Rs 600, and he gifted them to his son Dhruvit. When Dhruvit sells them, his taxable gain is calculated on a Rs 10 base, not Rs 600. He paid nothing for the shares but owes tax on Rs 590 per share. That is the part nobody explains at the time the gift is given. The same logic applies to property, jewellery, mutual funds, and any other capital asset received as a gift.
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What To Keep In Mind
“A gift that appears tax-free today can carry a significant tax liability for the recipient when the asset is eventually sold. India's Annual Information Statement now tracks property registrations and high-value transfers, meaning these transactions are visible to the tax department long after the gift was made,” informs Jain.
Understand the original cost of the asset before gifting it. That number does not disappear; it simply transfers to the next person who will one day have to calculate his/her capital gains with it.
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