Understanding Gifting option in detail

Gifting can be used thoughtfully to assist someone who may benefit immensely from the timely gift. In fact, the value of a gift is directly proportional to the need for it by the person receiving (donee) that gift. Timely gifting is priceless.

Hence, giving gifts to near and dear ones should be based on needs rather than just passing on a legacy after one’s lifetime. Gifts given, as can be readily understood, would not come back. Hence, one should gift only if that part is clear.

Before gifting one needs to ascertain how much one can gift without jeopardising one’s own situation. This is very important, as reckless gifting may end up hurting the benevolent giver.

What is a gift and its taxation?

What to give as a gift is upto the person giving the gift. There is no limit on how much one can gift. The gifts normally given are monetary gifts like a transfer of a certain sum to another’s account, cash gifts, investing in a product in the beneficiary’s name, taking insurance on the beneficiary’s name, property, vehicles, jewellery etc.

Many of the above-mentioned gifts are commonly timed to coincide with an important event like marriage, anniversary, child’s birthday etc.

Gifts received beyond Rs.50,000 in a year is taxable as income in the hands of the receiver. There is no implication to the giver. The exception is when a person is a relative as defined in IT act for gifting purposes. In such a case, it is not taxable at all. Friends do not come under this tax-exempt category.

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Gifts received from relatives are exempt from tax. by virtue of Section 56 of the Income Tax Act. According to the IT Act, following persons would be considered as relatives — spouse, brother or sister, brother or sister of the spouse, brother or sister of either of the parents, any lineal ascendant or descendant, any lineal ascendant or descendant of the spouse, spouse of the persons referred above.

There is another interesting distinction regarding gifting that you need to know. Gifts received during marriage from anyone at all is considered as Streedhan and is not added to the income and hence is tax-free. This exemption does not apply to any other occasion like Birthdays, anniversaries etc.

A closer look at property gifts

We have seen that property gifted by a relative is not taxed in the hands of the beneficiary. However, in case of property, while transferring property there would be stamp duty incidence normally. That would need to be paid.

However, there may be exceptions in some states. In the state of Maharashtra, the normal stamp duty is waived if the property is transferred to a close relative. This applies only if the property under question is a residential property or agricultural land. There is a concessional stamp duty rate for ancestral residential property and agricultural land. For any other property, stamp duty will be applicable at specified levels. However, this differs from state to state and hence, one needs to act in accordance with applicable state laws.

Other aspects of property as gifts

There are many instances of parents transferring property to their children and finding that they are not welcome to stay in their erstwhile property any longer. They cannot do anything in such a situation as the property ownership would have got transferred to children.

The better way to assist children, if they are in the same city, is to just allow them to stay with them. That way the home will still be in their name and custody.

If they want to help their children to buy a property in another city, it may be a better idea to jointly purchase the property along with their children. That way they would be able to help their children and the parents’ interests are protected as well.

In many cases, we have seen parents just giving the money needed to buy the home, without becoming co-owners. This kind of gifting is fine only if the amount being donated will not impact them financially.

Gifting in the age of unstable marriages

When something is gifted, it is part of the estate of the Donee. If parents gift a big sum of money / property it becomes the property of the children. If there is a rift in the marriage and there is a separation, the gifted assets will also form a part of the portfolio that would be sought to be divided.

In fact, huge gifting to children have sometimes even created the necessary conditions for separation as the couple feel they have enough money to live apart. Left to themselves, many such couples would have patched up and even made their marriage workable again.

Hence, gifting can create problems sometimes and gifting should be done with discretion.

Is a Gift deed mandatory?

Gift Deed is mandatory for property since it is a high value transaction. For other gift transactions, it is not compulsory. However, it is recommended to have a proper gift deed in place when the amount involved is large ( say anything more than Rs. 1 Lakh ).

A gift deed cannot be cancelled or reversed unless the donee has obtained the same by coercion, misrepresentation, fraud or other such means. The gift deed and gift are a non-reversible transaction in almost all cases and this needs to be borne in mind.

Gifting as an option can be effectively used during one’s lifetime. However, one needs to be clear about one’s intentions while gifting.  By now, it should be clear that gifting works when the donor wants to benefit the donee here and nowhere and now.

Wills may be more helpful to pass on the wealth as a legacy, after one’s lifetime. Which one is the more appropriate vehicle is hence contextual and situational and should be chosen with care.