The concept of “gifts” often brings joy, but under the Income Tax Act, not every gift is tax-free. To prevent misuse of gifts as a means of transferring unaccounted money, the Income Tax Act, 1961, under Section 56(2)(x), lays down specific provisions for taxation of gifts received by individuals and Hindu Undivided Families (HUFs).
What is Section 56(2)(x)?
Section 56(2)(x) states that if any person (individual or HUF) receives money, immovable property, or certain other properties without adequate consideration (i.e., free or at a price lower than fair value), then such receipt may be taxable in the hands of the recipient as “Income from Other Sources.”
This provision applies universally to all persons, irrespective of whether they are relatives or not, subject to some exemptions.
Types of Gifts Covered
- Monetary Gifts (Cash/Cheque/Draft/Electronic transfer) – If the aggregate value of money received during a financial year exceeds ₹50,000, the whole amount is taxable.
- Immovable Property (Land or Building) – If received without consideration (free) and the stamp duty value (SDV) exceeds ₹50,000, the entire SDV is taxable. If received for inadequate consideration and the difference between SDV and consideration exceeds ₹50,000 and 10% of consideration, the excess amount is taxable.
- Movable Property (Shares, securities, jewellery, bullion, paintings, art, etc.) – If received without consideration and the fair market value (FMV) exceeds ₹50,000, the entire FMV is taxable. If received for inadequate consideration and the difference between FMV and consideration exceeds ₹50,000, the excess is taxable.
Who is Exempt? (Gifts which are Not Taxable)
Not all gifts are taxed. Section 56(2)(x) provides exemptions in the following cases:
- Gifts from Relatives – Completely exempt, irrespective of amount. Relatives include spouse, parents, siblings, lineal ascendants/descendants, in-laws, etc.
- On the Occasion of Marriage – Gifts received by an individual on their own marriage are fully exempt.
- Under a Will or Inheritance – Gifts received by way of will or inheritance are exempt.
- In Contemplation of Death – Gifts given in contemplation of the donor’s death.
- From Local Authorities or Trusts – Gifts from specified institutions such as local authorities, charitable trusts, universities, etc.
Practical Example
- Mr. A receives ₹70,000 from a friend as a gift → Entire ₹70,000 is taxable.
- Ms. B receives ₹1,00,000 from her brother → Fully exempt (since from a relative).
- Mr. C receives a flat worth ₹20,00,000 from his uncle without paying anything → Entire stamp duty value taxable (since uncle is not covered in definition of “relative”).
- Ms. D buys land from her cousin for ₹10,00,000 while stamp duty value is ₹12,00,000 → Since the difference (₹2,00,000) is more than ₹50,000 and exceeds 10% of consideration, ₹2,00,000 is taxable.
Why Section 56(2)(x) is Important ?
Section 56(2)(x) of the Income Tax Act, 1961 is important because it acts as a safeguard against tax evasion by taxing money or property received without consideration or for inadequate consideration, thereby preventing the misuse of “gifts” as a means to transfer unaccounted wealth. At the same time, it ensures fairness by exempting genuine transactions such as gifts from close relatives, inheritances, or those received on the occasion of marriage, thus respecting personal and cultural practices. This provision maintains a balance between curbing tax avoidance and protecting legitimate, non-commercial transfers, thereby promoting transparency and integrity in the financial system.
Key Takeaway
- Gifts are taxable if they cross the ₹50,000 limit (except from relatives or on exempted occasions).
- Both cash and property gifts can be taxed.
- Always maintain proper documentation for exempt gifts (like marriage gifts or gifts from relatives).
In short, while gifts are a token of love and goodwill, when it comes to taxation, it’s best to stay informed about the rules under Section 56(2)(x) to avoid surprises from the tax department.
