Gift worth over ₹50,000 from a non-relative is taxable, but this rule could wipe out this liability; here’s how

Receiving cash, property, shares or other assets worth more than ₹50,000 from a non-relative as a gift is treated as taxable income under Section 56(2)(x) of the Income-tax Act, 1961. This often comes as a surprise to taxpayers who assume that gifts are always tax-free.

These taxable gifts are required to be reported under the head “Income from other sources” and is charged to tax at slab rates. However, the law also provides an important relief that can significantly reduce, and in some cases completely eliminate, the tax liability arising from such gifts.

In this article, we discuss the situations in which gifts do no attract tax, or where the resulting tax liability can effectively be reduced to zero, even if they are received from friends or relatives who are not covered under the definition of “relative” specified in the income tax law.

When gifts may not result in any tax outgo

A resident individual can claim a rebate under section 87A for both old and new tax regimes, although the income threshold and rebate amount differ.

• Old tax regime: A rebate of up to ₹12,500 is available if the total taxable income does not exceed ₹5 lakh.
• New tax regime: Rebate of up to ₹60,000 is available if the normal income taxable at slab rates does not exceed ₹12 lakh.

The rebate is 100% of your income tax liability or the maximum limit specified above, whichever is lower. Only individual taxpayers who are residents of India can claim this tax benefit, according to income tax rules.

As per Section 56(2)(x), if the aggregate value of all gifts received from non-relatives exceeds ₹50,000 in a financial year, the entire amount is treated as income of the taxpayer, unless it qualifies for specific exemptions such as gifts from specified relatives, inheritance, or assets received under a will.

Since gifts are taxed at slab rates, a resident individual whose total income (including such gifts) does not exceed ₹12 lakh under the new tax regime can use the Section 87A rebate to offset the tax liability completely, effectively reducing the tax payable on the gift to zero.

Other cases where gifts are not taxable

Income shall not arise under this provision if any sum of money or any property is received in certain specified circumstances:

Income shall also not arise under this provision if any sum of money or any property is received from specified bodies and individuals:

• Any specified relative
• Any local authority
• Any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in Section 10(23C)
• Any trust or institution registered under Section 12A/Section 12AA/Section 12AB;
• An individual by a trust created or established solely for the benefit of a relative of the individual.

In the case of HUF, every member of HUF will be treated as a relative. However, in the case of an individual, only some members are treated as a relative for the purpose of this provision, which include spouse, parents, siblings, child, grandparents, grandchildren, among others.