Day: November 21, 2012

Income Tax on Gifts from NRIs and Relatives in India

This article is written by Aashish Ramchand, a Chartered Accountant by profession. Aashish is the co-founder of makemyreturns.com. He also has completed his CFA Level I (American) and is very passionate about writing articles on taxes and tax advisory. He can be reached at connect@makemyreturns.com

Generally, gifts are not regarded as Income chargeable to tax. However by virtue of Section 56(2) any sum of money exceeding Rs. 50000 received without consideration by an individual or an HUF from any person is chargeable to tax as income under other sources subject to exclusions as below:

  1. Receipts on occasion of marriage of the individual
  2. Receipts under a will or inheritance
  3. Receipts received from a relative.

Since 1/10/2009, Section 56(2) has been amended and the scope of gifts and will include even immovable properties or any other property besides sums of money under its ambit.

Gifts that are not taxable at all are those that are received from relatives. Relatives are defined by the following relationships of the individual:

  1. Parents
  2. Parents siblings and their spouse
  3. Siblings
  4. Spouse of siblings
  5. Daughter and son
  6. Spouse of daughter and son
  7. Spouse
  8. Spouse’s parents
  9. Spouse’s siblings and their respective spouse.

Even NRIs are covered as long as they fall in the category of relatives. Therefore an individual Indian resident can receive a tax free gift from an NRI as long as he/she is that individuals relative. Any amount can be received as a gift from a relative. Also the purpose for which the gift is received from a relative is inconsequential as it is completely tax free. Thus a gift received can be used for any purpose ranging from purchasing shares to buying property to even simply keeping it with the bank.

Note on gifting on immovable properties

There is a valuation aspect involved in gifting of immovable properties:-

  1. If the property is gifted without any consideration then if the stamp duty value exceeds Rs. 50000/-, stamp duty value will be taken
  2. If the property is gifted for a consideration, then the actual value of the property will be taken

In case of other properties:

  1. If gifted without consideration and fair market value exceeds 50000, then the fair market value will be taken as the final value
  2. If gifted for a consideration and the FMV less consideration is greater than 50000, then the FMV less consideration amount will be taken as the value of the gift.

As mentioned earlier NRIs can also give gifts to resident Indians. Therefore, It is important to understand the meaning of an NRI as per the IT act.

An individual will be treated as a non resident in India in any previous year if he fulfils any of the following two conditions:

  1. he/she is NOT in India in that year for period or periods amounting in all to 182 days or more, or
  2. Having within the four years preceding that year NOT been in India for a period or periods amounting in all to 365 days or more, and has NOT been in India for 60 days or more in that year.

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What do I need to buy tax free bonds?

A friend recently emailed asking for suggestions on investments for her baby girl, and I suggested that tax free bonds are going to be issued later this year, and that’s a good option for you.

She asked what she needed to invest in them, if she needed a Demat account, and I thought it would be a good idea to write about three things that I think everyone should consider (not necessarily need) if they want to invest in tax free bonds.

You need a Demat account to buy tax free bonds

As far as I can remember all tax free bonds needed Demat accounts last year, and although I haven’t checked all older posts, the ones I saw mention that a Demat account is needed.

Now, as far as who you should open that with – I think there is very little difference apart from cost and even with cost it doesn’t vary a lot.

Tax free bonds already listed in the market

The next thing to consider is that you can buy tax free bonds already listed in the market so the new bonds should be compared with what’s on offer already. The tax free bonds that are issued this year will very likely have a lower interest rate than the ones issued last year but because the price of the existing bonds has risen up in the past few days it may still be just better to buy the new bonds.

We have to wait and watch what happens but that’s one comparison that is useful, and when the terms of the bonds are out, I will have that on here.

Tax free bonds don’t reinvest your interest

There was a very lively debate last year among readers on the returns calculation from a SBI fixed deposit that compounds your interest 4 times a year, and then you can reinvest this money for a longer term, something you can’t do with a tax free bond as it pays you the interest every year without the reinvestment option.

I did a very detailed post with calculations that showed comparisons between the two, but I think Hemant did a much better job explaining how this affects returns and you should read point 2 from the post before investing in these bonds.

The takeaway is that if you don’t reinvest the interest from the bonds, and just spend it away then you aren’t going to make too much.

Conclusion

Finally, though not really the topic of this post, if you’re planning investments for your baby or retirement or buying a car or just about anything, just one product will not give you the best results. You have to mix and match and buy a few things to get the most out of your money.

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