Understanding taxes: Some gifts can be expensive this Diwali

People receiving gifts, in cash or kind, will have to pay tax, if the value exceeds Rs 50,000. Investmentyogi.com tells you how.

Until now, income tax was levied only on cash gifts above this amount. However, a notification issued by the Central Board of Direct Taxes (CBDT) said the revised norms will come into effect from October 1, 2009.

"Any such person who receives a gift of any such property on or after October 1, 2009, must pay income tax due on the value of the gift and disclose the taxable value of such property in the return of income for assessment year 2010-11 and subsequent years," said the CBDT statement.

It is important to know the details of this tax liability to make sure that you are not caught on the wrong side of the law. Individuals receiving shares, gadgets, automobiles, jewellery, valuable artifacts or even property valued at over Rs 50,000 as gifts from non-relatives, will have to start paying tax from October 1, 2009.

It means that if you receive high value gifts then the value of these gift will be added to your total income and the corresponding Income Tax will be deducted. These types of gifts will be considered as income from other sources from assessment year 2010-11 onwards.

For example, if you received a car for Rs 6,00,000 from a friend, you will have to pay up to Rs 1,80,000, if your income falls in the highest tax bracket of 30 per cent. In case a property has been sold at a nominal rate as a gift, the receiver will have to pay taxes on the difference between state government notified rate and the purchase price.

These changes were brought in to plug the loophole in Section 56 according to which only cash gifts of more than Rs 50,000 from non-relatives were taxed. You could have received gifts as shares or any other non-cash instrument and avoided paying tax. From October 1, 2009 this will not be possible.

However, gifts to relatives and gifts for a wedding are not taxed. Here are some tax exempt categories to utilise gift tax provisions in your favour:

1. Any gift from relatives of any amount during the financial year is completely exempt from tax. For income tax department a relative means the following: (also depicted in the image alongside)

a. Your spouse

b. Your brothers and sisters and their spouses

c. Your spouse's brothers and sisters and their spouses

d. Brother and sister of your parents and their spouses

e. Any lineal ascendant (parents, grandparents, children, grandchildren) or descendants (children, grandchildren)

f. Any lineal ascendant (parents, grandparents, children, grandchildren) or descendant of your spouse (children, grandchildren)

2. The provision is applicable only to individuals and HUF (Hindu Undivided families) but if a gift is received by a trust or a society then it is tax exempt.

3. Gifts received from anybody for weddings are tax exempt.

4. Following other kinds of gifts are also exempt from the tax axe:

• Gift received under a will or by way of inheritance
• Gift received due to of death of the donor
• Gift from any local authority 
• Gift from any fund or foundation or university or other educational institution or hospital or any trust or any institution referred to in Section 10(23C) and
• Gift from any trust or institution, which is registered as a public charitable trust or institution under Section 12AA.

Be careful while accepting expensive gifts this festive season. It may turn out to be expensive!