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Gifts Treated as Income

Generally, gifts received are not regarded as Income chargeable to tax.

However, by virtue of section 2(24)(xiii) r.w.s. 56(2)(v) after 
1-9-2004 any sum of money exceeding ₹ 50,000 received without consideration by an individual or an HUF from any person is chargeable to tax as Income under the head Other Sources, subject to following exceptions:

  1. Receipts from Relative. (Refer Chart at the bottom)
  2. Receipts at the time of Marriage.
  3. Receipts by way of Inheritances or by will
  4. Receipts Contemplation of Death
  5. Receipts from Local Authority u/s. 10(20)
  6. Receipts from Charitable Trust registered u/s. 12AA
  7. Receipts from fund/foundation/Institution/hospital/medical institution referred in Sec. 10(23C)
  8. Receipt by a fund/foundation/hospital/medical institutions referred to in sub-clauses (iv), (v), (vi) and (via) of Sec. 10(23C)
  9. Receipts from certain specified restructuring (mentioned later)
  10. Receipts from a private trust created solely for the benefit of his relatives.

List of Property – (to be treated as Gift)

  1. Immovable property being land or building or both;
  2. Shares and securities;
  3. Jewellery;
  4. Archaeological collections;
  5. Drawings;
  6. Paintings;
  7. Sculptures;
  8. Any work of art;
  9. Bullion (w.e.f. – 1-6-2010)

Section 56(2) has been further amended and w.e.f. 1-4-2017, the scope of taxation on gifts is increased by taxing gifts in case of all the persons instead of the specified ones mentioned in 56(2)(vii) 
[S. 56(2)(x)]

Earlier Now
Section 56(2)(vii) & (viia) Section 56(2)(x)
Applicable only in case of individual, HUF; Firm and Co. in certain cases, wherein, receipt of sum of money or property without or inadequate consideration in excess of 
₹ 50,000/- shall be chargeable to tax under income from other sources.		 This Section is newly inserted, wherein, any person receiving sum of money or property without or inadequate consideration in excess of 
₹ 50,000/- shall be chargeable to tax under income from other sources.

Valuation of Gift in case of

  1. Immovable Property (being land or building or both)

56(2)(x)(b) – Immovable Property – Without Consideration

If SDV ≤50,000 If SDV > 50,000
Donor Donee Donee Donor
Provisions not applicable Not considered as transfer u/s. 47(iii) – No Capital Gain SDV is income from other Sources u/s. 56(2)(vii).

COA will be SDV.

Holding period will be counted from acquisition of property by donee.
       

56(2)(x)(b) – Immovable Property – Inadequate Consideration

If SDV - Consideration value ≤50,000 If SDV - Consideration value > 50,000
Donor Donee Donor Donee
Provisions not applicable Section 50C will be applicable if Land & Building is capital Assets for Donor and Sale Consideration for Donor will be SDV. Capital Gain will be SDV less COA.

Section 43CA will be applicable if Land & Building is not a capital Asset for Donor and Sale Consideration for Donor will be SDV. Income from PGBP will be SDV less COA.

 Difference of SDV and Consideration is income from other Sources u/s. 56(2)(vii). At the time of further sale COA will be SDV and holding period will be counted from acquisition of property.
       

It is also provided that in a case where the date of the agreement to purchase the property fixing the consideration and the date of registration are different, the taxability will be determined with reference to the stamp duty value on the date of agreement and not registration. This exception will apply only where at least part of the consideration has been paid by any mode other than cash, on or before the date of such agreement.

(ii) Any other property:

56(2)(x)(c) – Movable Property – Without Consideration

If FMV≤50,000 If FMV > 50,000
Donor Donee Donor Donee
Provisions not applicable Not considered as transfer 
u/s . 47(iii) – No Capital Gain		 Fair Market Value (FMV) shall be income from other Sources u/s. 56(2)(vii). COA will be FMV. Holding period will be counted from the date of acquisition of property by donee.
       

56(2)(x)(c) – Movable Property at inadequate Consideration

If FMV - Consideration value ≤50,000 If FMV - Consideration value > 50,000
Donor Donee Donor Donee
Provisions not applicable Not considered as transfer 
u/s. 47(iii) – No Capital Gain		 Difference of FMV and Consideration is income from other Sources u/s. 56(2)(vii). At the time of further sale COA will be FMV and holding period will be counted from acquisition of property
       

W.e.f. 1-6-2010 following items added u/s. 50(2) (viia) :

Receipt of shares of a closely-held company without consideration or inadequate consideration by firm (incl. LLP) or closely held company from closely held company is taxable.

Provision not applicable in case of the following restructuring:

  1. Transfer of shares of Indian company by amalgamating foreign company to amalgamated foreign company
  2. Transfer of shares of Indian company by demerged foreign company to resulting foreign company
  3. Transfer by shareholder of co-operative bank in a business reorganisation of a co-operative bank.
  4. Transfer by shareholder of shares of amalgamating company
  5. Transfer or issue by the resulting company, in a scheme of demerger,
  6. A resulting company pursuant to a scheme to a scheme of demerger; or
  7. An amalgamated Indian company pursuant to a scheme of amalgamation;
  8. A successor co-operative bank, in a business reorganisation, in lieu of shares of a predecessor co-operative bank.

Valuation rules for determining ‘fair market value of gifts’ Synopsis of the Rules

The rules 11U and 11UA prescribes the different methods for the purpose of valuation of specified assets.

The determination of FMV, under this rule, will be only for the purpose of section 56 of the Act.

Notification No. 23/2010, which came into force from 1st October, 2009. Further, specified assets received from relative are not covered by the provisions of section 56(2)(vii) of the Act.

Methods of Valuation

1. Valuation of specified assets (other than shares & securities)

Description of the property Basis for determination of FMV
Specified assets other than shares and securities Estimated price which specified asset will fetch if sold in the open market on the valuation date
In case if specified assets are received by the way of purchase on the valuation date from the Registered Dealer (means a dealer who is registered under Central Sales Tax Act, 1956 or General Sales Tax Law for time being in force in any State including value added tax laws). FMV is the Invoice Value of the asset
In case if specified assets are received by any other mode and the value of the specified assets > ₹ 50,000 The assessee may obtain the report of registered valuer in respect of the price it would fetch if sold in the open market on the valuation date

A registered valuer is a person who is entitled to function as registered valuer for the purpose of the Wealth Tax Act.

2. Valuation of Shares & Securities

  • Valuation of Quoted Shares & Securities
Description of the property Basis for determination of FMV
If quoted shares and securities are received by way of transaction carried out through any Recognised Stock Exchange (RSE) Transaction value recorded in such RSE
If quoted shares and securities are received by way of transaction carried out other than through any RSE. Lowest price quoted on any RSE on the valuation date

If in case there is no trading on the valuation date, then, FMV will be lowest price on the date immediately preceding the valuation date when trading happened
  • Valuation of Unquoted Shares
Description of the property Basis for determination of FMV
Unquoted Equity Shares Value as per the balance sheet (including notes thereto) on the valuation date in terms of the following formula:

(A - L) x PV
PE

Where,

A = Book value of assets in balance sheet less advance income-tax paid, any amount which does not represent the value of any asset, including debit balance in profit & loss account

L = Book value of liabilities in balance sheet less

  1. Paid-up equity capital;
  2. Amount set aside for undeclared dividend;
  3. Reserves, other than towards depreciation;
  4. Credit balance in profit & loss account;
  5. Amount of provision for tax, other than advance income-tax paid in excess of tax payable with reference to book profits (minimum alternate tax);
  6. Provision towards unascertained liabilities;
  7. Provision towards contingent liabilities.

PE = Total amount of paid-up equity share capital

PV = Paid-up value of such equity shares received
  • Valuation of Unquoted Shares other than equity shares
Description of the property Basis of determination of FMV
Unquoted shares and securities other than equity shares in a company which are not listed in any RSE Price it would fetch if sold in open market on the valuation date & the assessee is required.

To obtain a report from a Merchant Banker or a Chartered Accountant in support of the FMV

Sec. 56(2)(viib) applies to closely held company : (Applicable w.e.f. A.Y. 2013-14 )

Description of the property Basis of determination of FMV
Firm (incl. LLP) or closely held company receives any consideration from resident person for issue of shares of closely held company > the face value of shares FMV to be determined in accordance with the prescribed method or as substantiated by the company to the satisfaction of the AO whichever is higher.

To obtain a report from a Merchant Banker or a Chartered Accountant in support of the FMV
  • Provision does not appliy to amount received by venture capital undertaking from a venture capital fund or venture capital company.

Forfeiture of Advance section 56(2)(ix)

Where any sum of money received as an advance or otherwise in the course of negotiations for transfer of Capital Assets, is forfeited and the negotiations do not result into transfer of such capital asset, then such sum shall be chargeable under this section as “Income from other sources”.

 

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