Tax treatment of a sum of money received as a gift under section 56(2) (as set, 1961 Act, AY 2018-19)

The provision that applies for assessment year 2018-19

A gift of money is taxed under the head Income from other sources (section 56(2)). Two clauses deal with it:

• section 56(2)(vii), for an individual or a Hindu undivided family, covers sums received from 1 October 2009 up to 31 March 2017;
• section 56(2)(x), inserted with effect from 1 April 2017, covers sums received by any person (an individual, a family, a firm, a company and so on) on or after 1 April 2017.

Previous year 2017-18 began on 1 April 2017, so every gift received in it, for assessment year 2018-19, falls under section 56(2)(x).

When a gift of money is taxed

Where a person receives in a previous year, from one person or more, any sum of money without consideration, and the aggregate of such sums in the year is more than ₹50,000, the whole aggregate is taxable, not merely the excess over ₹50,000 (section 56(2)(x)(a)). If the total of all such gifts in the year is ₹50,000 or less, nothing is taxed. Gifts from different donors are added together for the test.

Gifts that are not taxed

The clause does not apply to money received (proviso to section 56(2)(x)):

1. from a relative;
2. on the occasion of the marriage of the individual (from anyone, and of any amount);
3. under a will or by way of inheritance;
4. in contemplation of the death of the donor;
5. from a local authority;
6. from a fund, foundation, university, educational institution, hospital or other medical institution, trust or institution referred to in section 10(23C), or from or by a trust or institution registered under section 12A or 12AA;
7. by way of a transaction that is not a transfer under the listed clauses of section 47 (such as a distribution on partition of a family);
8. from an individual by a trust created solely for the benefit of the individual's relatives.

Exempt gifts are left out before the ₹50,000 test is applied.

Who is a relative

For an individual, a relative is (Explanation to section 56(2)(vii), clause (e), which section 56(2)(x) adopts): the spouse; a brother or sister; a brother or sister of the spouse; a brother or sister of either parent; any lineal ascendant or descendant of the individual or of the spouse; and the spouse of any of these. For a Hindu undivided family, any member of the family is a relative.

Other points

• The gift is income of the previous year in which it is received (section 56(2)(x) speaks of sums received in any previous year).
• A gift in kind (jewellery, shares, land) is dealt with by the other sub-clauses of section 56(2)(x) on its value; only money is asked about here.

Illustration

In 2017-18 Mr. Sahil receives ₹30,000 from a friend, ₹40,000 from a colleague, ₹1,00,000 from his maternal uncle and ₹2,00,000 from friends at his wedding. The uncle is a brother of his mother, a relative, and wedding gifts are excluded, so both are left out. The other gifts total ₹70,000, which is more than ₹50,000, so the whole ₹70,000 is taxable for assessment year 2018-19.