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Gift tax exemption rules: who can receive gifts from relatives that are tax-free?

This article tells you who all can receive gifts of cash, shares, property or any other assets from you without paying any gift tax.

Gift tax exemption rules: who can receive gifts from relatives that are tax-free?


Posted on 08 Nov 2023
Author: Sayan Sircar
6 mins read
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This article tells you who all can receive gifts of cash, shares, property or any other assets from you without paying any gift tax.

Gift tax exemption rules: who can receive gifts from relatives that are tax-free?

This article is a part of our detailed article series on the concept of gifting assets and investing in the name of your relatives. Ensure you have read the other parts here:

📚 Topics covered:

What is a gift and why does the receiver need to pay taxes on it?

A gift is when you give

  • money
  • movable assets (shares, mutual funds in a demat account, gold or jewellery etc.) either for free or at lower market price
  • immovable assets (house, land etc.) either for free or at lower market price

to anyone.

The income tax department wants the receiver (called donee), and not the giver (donor), to pay taxes on receiving the gift called gift tax. This rule exists since without it, capital gains or interest income stops becoming taxable. For example, to pay for a foreign trip, you gift your travel agent 5 lakhs in mutual fund units and they gift that to the airline to buy tickets. The government misses out on taxes.

That being said, gifts to relatives is tax-free in the hands of the receiver as long as certain conditions are met.

Who is a relative who does not have to pay gift tax?

(click to open in a new tab)
Who does not have to pay tax on receiving a gift

Source: https://incometaxindia.gov.in/Tutorials/18.%20Tax%20treatment%20of%20gifts.pdf

How to interpret the diagram:

  • Step 1: You need to start on the top-most box titled ‘Individual’
  • Step 2: Choose the applicable arrows to move to an applicable family member
  • Step 3: If you have found the person in the chart, the gift will be tax free. If you cannot find, the gift will be taxable typically above the ₹50,000/year limit

A few worked out examples:

  • Father-in-law to daughter-in-law: Individual > Children > & their Spouse. So tax-free
  • Child to parents: Individual > Parents. So tax-free
  • Father to brother’s son: Individual > Brother. Brother’s son is not present in the chart. So not tax-free
  • Grandfather to grandchild: Individual > Children > Grandchildren. So tax-free

Related:
How can grandparents invest for their grandchildren?

One exception is gifts received in the case of marriage are tax-free. The opposite exception is that gifts from non-members to HUF is tax-free only below ₹50,000/year.

Related:
How to set up a HUF to save taxes in the right way?

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Does the relative ever pay tax on the received gift?

Just because there is no gift-tax on the gift to a relative, it does not mean that there is no tax on this amount after that. Any income via interest, dividend, rent or capital gains becomes taxable in the usual way in the hands of the owner of the assets who will be the receiver of the gift. If the receiver does not have income, clubbing with income of the donor might apply.

If there is capital gains, the original acquisition date and price will be applicable. For example, a father bought 100 units of a mutual fund for ₹50/unit in 2015 and in 2023 gifts them to a major child who then sells it for ₹100/unit. In this case, purchase price and date will be the same as the numbers in 2015.

Should the relative make a gift deed?

A simple gift deed that captures the details of the gift, the donor and donee/receiver details and the fact that no consideration is paid, is a good practice. It provides proof that should be tax free in case of an income tax audit.

If the items being gifted are shares or mutual funds, or anything that has a purchase date and price, include those details in the deed for making it easy to calculate capital gains in the future.

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This post titled Gift tax exemption rules: who can receive gifts from relatives that are tax-free? first appeared on 08 Nov 2023 at https://arthgyaan.com


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