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 Rs. 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: (a) Receipts from certain relatives; as defined in the section. (Refer Chart) (b) Receipts on occasion of marriage of the individual. (c) Receipts under a will or inheritance. (d) Receipts in contemplation of death of the payer.

Sec. 56(2)(v) has been amended by the Taxation Laws (Amendment) Act, 2006 so as to exempt also the receipts from (i) local authority, (ii) institutions exempt u/s. 10(23C) and (iii) trusts/institutions registered u/s. 12AA.

Sec. 56(2) has been further amended and w.e.f. 1-10-2009, the scope of gift is increased by adding immovable property or any property besides sum of money [S. 56(2)(vii)] excluding stock-in-trade, raw material, consumable stores or any other trading assets as under:

List of Property –

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;

Valuation of Gift in case of

1. Immovable Property

(a) without consideration – if stamp duty value exceeds ` 50,000/-, stamp duty value

(b) for a consideration which is less than stamp duty value – if the stamp duty value exceeds the consideration by ` 50,000/-, stamp duty value less consideration (w.e.f. A.Y. 2014-15)

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.
 

2. Any other property:

1. without consideration – fair market value exceeds ` 50,000/-, fair market value of the property

2. for a consideration – fair market value less consideration exceeds ` 50,000/-, the fair market value less consideration.

w.e.f. 1-6-2010 following items added:–

1. Bullion

2. Receipt of shares of a closely-held company without consideration or inadequate consideration is taxable.

3. 50(2) (viia)

A. 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 reorganization of a co-operative bank.

4. Transfer by shareholder of shares of amalgamating company

B. Receipt of shares of a closely-held company by a firm (including LLP) or a closely-held company taxable if transfer is without consideration or for inadequate consideration.

C. Fair market value less consideration is taxable, subject to difference of more than Rs. 50,000.

D. Amount taxed to be treated as cost of acquisition in the hands of recipient.

Gift of more than Rs. 50,000/- can be received from
below mentioned relatives without any taxes

Notes:

1. Subject to clubbing provisions applicable for Gift received from Spouse and Parent-in-Law.

2.  The individual can receive gifts without attracting tax also from lineal ascendants and decendants of the individual/spouse of the individual, other than those mentioned in the above chart.

Valuation rules for determining ‘fair market value of gifts’

Background

The Finance (No. 2) Act, 2009 has inserted clause (vii) in section 56(2) of the Income-tax Act (‘the Act’) to tax an Individual or a Hindu Undivided Family (HUF) who is receiving any asset which is in the nature of shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures or any work of art (specified assets) without consideration or for inadequate consideration i.e. consideration which is less than fair market value (FMV) by an amount exceeding Rs. 50,000. Further, the Finance Act, 2010 introduced similar provisions to tax receipt of shares of a closely-held company by a firm or another closely held company w. e. f. 1-6-2010. For the purpose of determining fair market value, Rules 11U and 11UA were introduced. With the applicability of the Act, Rules are also applied accordingly.

Synopsis of the Rules

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

The FMV of the specified asset needs to be determined on a date on which such specified assets are received by the assessee.

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)

2. Valuation of Shares &  Securities

• Valuation of Quoted Shares & Securities

• Valuation of Unquoted Shares

• Valuation of Unquoted Shares other than equity shares

Applicable w.e.f. A.Y.2013-14

Sec 56(2)viib) applies to Closely held company :

Where a closely held company receives any consideration from resident person for issue of shares that exceeds the face value of shares, then the consideration received in excess of the fair market value of the shares shall be taxable under the head Income from other sources.

• Fair market value to be determined in accordance with the prescribed method or as substantiated by the company to the satisfaction of the AO whichever is higher.

• Provision does not appliy to amount received by venture capital undertaking from a venture capital fund or venture capital company.

Retrospective amendment for gifts received by HUF :

Any sum or property received without consideration or inadequate consideration by HUF from its members would also be excluded from taxation. w.e.f. 1-10-2009 [Refer amendment made to sec. 56(2)(vii)]