Section 56(2) of Income Tax Act 2018: Taxation of Gifts – Rules, Exemptions, and Valuation

March 7, 2023

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Section 56(2) of the Income Tax Act 2018: An Overview

The Income Tax Act 2018 (ITA 2018) is the primary legislation governing taxation in India. The Act contains provisions that outline how taxpayers are to be taxed, and how the government can enforce these tax laws. One such provision is section 56(2), which outlines the tax implications of gifts received by an individual or entity. In this blog post, we will explore section 56(2) of the ITA 2018 in detail, discussing its purpose, scope, and key provisions.

Purpose of Section 56(2)

The purpose of section 56(2) of the ITA 2018 is to tax any gift that is received by an individual or entity that exceeds a certain monetary threshold. This section was introduced to curb the practice of giving and receiving undisclosed gifts in cash or kind, which was a common practice in the past. By introducing this provision, the government aimed to bring more transparency to gift-giving practices and prevent tax evasion.

Scope of Section 56(2)

Section 56(2) of the ITA 2018 applies to all gifts received by an individual or entity during a financial year. The scope of this section extends to both monetary and non-monetary gifts, including immovable property, shares, jewelry, artwork, and other assets. This provision also covers gifts received from both residents and non-residents of India.

Key Provisions of Section 56(2)

There are several key provisions outlined in section 56(2) of the ITA 2018. These include:

Monetary Threshold: Section 56(2) imposes a monetary threshold on the value of gifts that can be received tax-free by an individual or entity. As of the financial year 2021-22, this threshold is set at Rs. 50,000. Any gift that exceeds this amount is subject to tax.
Tax Rate: The tax rate for gifts received under section 56(2) is the same as the tax rate for the recipient’s income. This means that if an individual receives a gift worth Rs. 1,00,000 and falls under the 30% tax bracket, they will be required to pay Rs. 30,000 as tax on the gift.
Exceptions: There are certain exceptions to the taxation of gifts under section 56(2). For example, gifts received from family members, on the occasion of marriage, or under a will are exempt from tax. Additionally, gifts received by a charitable organization or a political party are also exempt from tax.
Valuation of Non-Monetary Gifts: Non-monetary gifts, such as immovable property or shares, are subject to tax based on their fair market value. This means that the recipient must pay tax on the current market value of the asset, even if they received it at a lower price.

In addition to the key provisions outlined above, section 56(2) of the ITA 2018 also includes certain nuances that taxpayers should be aware of. For example, the provision specifies that gifts received from employers by their employees are taxable as a perquisite under section 17(2) of the ITA 2018. This means that any gift received by an employee from their employer is subject to tax, regardless of whether it exceeds the Rs. 50,000 threshold.

Another important aspect of section 56(2) is the valuation of gifts received in kind. Under the provision, gifts received in kind are taxed at their fair market value, which can be determined by a registered valuer. However, the provision also specifies that the fair market value cannot exceed the cost of acquisition of the asset by the donor, or the price at which the asset is sold in the open market.

It is also worth noting that section 56(2) does not apply to gifts received by charitable trusts or institutions that are registered under section 12AA of the ITA 2018. This exemption extends to gifts received by these organizations from any person, whether resident or non-resident.

Finally, it is important to note that section 56(2) is subject to change from year to year, as the monetary threshold and tax rates may be revised by the government. It is therefore essential for taxpayers to stay up-to-date with any changes to the provision in order to ensure compliance with the law.

One of the most important aspects of section 56(2) of the ITA 2018 is the valuation of gifts received in kind. Valuing non-monetary gifts can be complex and can often lead to disagreements between taxpayers and tax authorities. To address this issue, the government has prescribed specific rules for determining the fair market value of different types of assets.

For example, for immovable property, the fair market value is determined based on the stamp duty value of the property as assessed by the state government. If the stamp duty value exceeds the sale consideration by more than 10%, then the stamp duty value will be considered as the fair market value.

Similarly, for shares and securities, the fair market value is determined based on the average of the highest and lowest quoted prices on the recognized stock exchange on the date closest to the date of receipt of the shares or securities.

For jewelry, paintings, and other artworks, the fair market value is determined by a registered valuer based on the actual market value of similar items sold in the relevant market.

It is important for taxpayers to follow these rules for valuation, as any discrepancies can result in penalties or legal action by the tax authorities.

Another important provision of section 56(2) is the exception for gifts received from family members. Under the provision, gifts received from relatives are exempt from tax, regardless of their value. The term “relative” is defined broadly and includes spouses, siblings, parents, grandparents, and even great-grandparents. However, gifts received from non-relatives are subject to tax if they exceed the Rs. 50,000 threshold.

Conclusion

In conclusion, section 56(2) of the ITA 2018 is an important provision that regulates the taxation of gifts received by individuals or entities. The provision aims to bring transparency to gift-giving practices and prevent tax evasion. As a taxpayer, it is essential to be aware of the monetary threshold and tax rate for gifts received, as well as the exceptions and valuation rules for non-monetary gifts. By understanding these provisions, taxpayers can ensure that they comply with the law and avoid any penalties for non-compliance.

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Frequently Asked Questions (FAQs)

What is Section 56(2) of the Income Tax Act 2018?

Section 56(2) is a provision in the Income Tax Act 2018 that deals with the taxation of gifts received by individuals and entities. It specifies the tax rate and monetary threshold for gifts, as well as the valuation rules for gifts received in kind.

2. What is the tax rate under Section 56(2)?
The tax rate under Section 56(2) is 30% of the fair market value of the gift received. However, certain exemptions and exceptions may apply, depending on the nature and value of the gift.

3. What is the monetary threshold for gifts under Section 56(2)?
The monetary threshold for gifts under Section 56(2) is Rs. 50,000. Gifts received above this amount are subject to tax under the provision.

4. What types of gifts are taxable under Section 56(2)?
Any gift received in cash or kind is taxable under Section 56(2), unless it falls under a specific exemption or exception.

5. What is the valuation method for gifts received in kind under Section 56(2)?
Gifts received in kind are valued at their fair market value, which can be determined by a registered valuer. The fair market value cannot exceed the cost of acquisition of the asset by the donor or the price at which the asset is sold in the open market.

6. Are gifts received from family members taxable under Section 56(2)?
Gifts received from relatives are exempt from tax under Section 56(2), regardless of their value. The term “relative” includes spouses, siblings, parents, grandparents, and great-grandparents.

7. Are gifts received by charitable trusts or institutions taxable under Section 56(2)?
Gifts received by charitable trusts or institutions that are registered under section 12AA of the ITA 2018 are exempt from tax under Section 56(2).

8. Can gifts received by employees from employers be taxed under Section 56(2)?
Gifts received by employees from employers are taxable as perquisites under section 17(2) of the ITA 2018, regardless of their value.

9. What happens if a taxpayer fails to report taxable gifts under Section 56(2)?
Failure to report taxable gifts under Section 56(2) can result in penalties and legal action by the tax authorities. Taxpayers should ensure that they report all taxable gifts accurately and in a timely manner.

10. Can taxpayers claim deductions for gifts given under Section 56(2)?
Taxpayers cannot claim deductions for gifts given under Section 56(2). The provision only deals with the taxation of gifts received, not gifts given.