Section 56(2)(vii) of the Income Tax Act: An Overview
The Indian Income Tax Act, 1961, includes various provisions that regulate taxation on income earned by individuals and entities in India. Section 56(2)(vii) is one such provision that deals with the taxation of gifts received by an individual or entity. In this blog, we will discuss Section 56(2)(vii) in detail, including its scope, applicability, and implications.
Understanding Section 56(2)(vii)
Section 56(2)(vii) of the Income Tax Act states that any sum of money or property received by an individual or entity without consideration (i.e., as a gift) is taxable under the head “Income from Other Sources” if the aggregate value of such gifts exceeds Rs. 50,000 in a financial year. The term “property” in this context refers to any asset or investment that has a monetary value, such as land, buildings, shares, securities, and jewellery.
Applicability of Section 56(2)(vii)
Section 56(2)(vii) applies to all individuals and entities in India, including resident and non-resident individuals, Hindu Undivided Families (HUFs), companies, firms, and other associations of persons (AOPs) or bodies of individuals (BOIs).
Exceptions under Section 56(2)(vii)
There are a few exceptions to the applicability of Section 56(2)(vii). The following gifts are not taxable under this section:
- Gifts received from relatives: Gifts received from certain specified relatives, such as parents, grandparents, spouse, brother, sister, etc., are exempt from tax. However, gifts received from non-relatives are taxable.
- Gifts received on occasions such as marriage or inheritance: Gifts received on the occasion of marriage, or by way of inheritance, or in contemplation of death of the payer, are also exempt from tax.
Implications of Section 56(2)(vii)
If the value of the gift exceeds Rs. 50,000, the recipient is required to disclose it while filing their income tax return (ITR) for the relevant financial year. The gift will be added to the total income of the recipient and taxed at the applicable income tax rate.
In case the recipient fails to disclose the gift in their ITR, the tax department may initiate penal action against them. The penalty can be up to three times the amount of tax payable on the undisclosed gift.
The provision of Section 56(2)(vii) was introduced in the Income Tax Act to curb the practice of individuals and entities receiving gifts in order to avoid tax liabilities. Prior to the introduction of this provision, individuals and entities used to receive large sums of money and assets as gifts, which were not taxable under the Income Tax Act. This allowed them to evade tax liabilities on a significant portion of their income.
With the introduction of Section 56(2)(vii), the tax department can now scrutinize large gifts received by individuals and entities, and ensure that they pay taxes on such income. This has helped the government in increasing tax revenues and reducing tax evasion.
It is important to note that Section 56(2)(vii) applies to all types of gifts, including those received from friends, acquaintances, or even strangers. The provision does not differentiate between gifts received from known or unknown sources, and all such gifts are taxable if they exceed Rs. 50,000 in a financial year.
In addition to the exceptions mentioned above, there are certain other types of gifts that are exempt from tax under Section 56(2)(vii). For instance, gifts received by a trust or institution registered under section 12AA of the Income Tax Act, or by a political party registered under section 29A of the Representation of People Act, 1951, are exempt from tax.
One of the major implications of Section 56(2)(vii) is that it has a significant impact on the transfer of assets within families or between related entities. For instance, if a father gifts a property to his son, and the value of the property exceeds Rs. 50,000, the son will have to pay tax on the value of the gift. This has led to several discussions and debates on the impact of the provision on family businesses, succession planning, and inter-generational transfer of wealth.
To address these concerns, the government has introduced several amendments to Section 56(2)(vii) over the years. For instance, in the 2019 Union Budget, the government announced that gifts received by individuals and HUFs from a specified relative would not be taxable, even if the value of the gift exceeded Rs. 50,000. This has provided relief to families and individuals who transfer assets within the family.
Another amendment introduced by the government in 2017 was the introduction of the concept of fair market value (FMV) for the valuation of assets received as gifts. Earlier, the value of the gift was determined based on the cost at which the payer acquired the asset. However, with the introduction of FMV, the value of the asset is determined based on the prevailing market value of the asset on the date of the gift. This has helped in reducing disputes between the tax department and taxpayers on the valuation of assets.
Conclusion
Section 56(2)(vii) of the Income Tax Act is an important provision that regulates the taxation of gifts received by individuals and entities in India. The provision applies to all gifts received without consideration, and the aggregate value of such gifts exceeding Rs. 50,000 in a financial year is taxable. However, there are certain exceptions to this rule. It is essential for recipients to disclose the gift in their ITR to avoid any penalty or legal action.
Read more useful content:
- section 145 of income tax act
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Frequently Asked Questions (FAQs)
- What is Section 56(2)(vii) of the Income Tax Act?
Section 56(2)(vii) is a provision in the Income Tax Act that taxes gifts received by individuals and entities above a certain threshold amount.
2. What is the threshold amount for taxability under Section 56(2)(vii)?
The threshold amount for taxability under Section 56(2)(vii) is Rs. 50,000 in a financial year.
3. Are all gifts taxable under Section 56(2)(vii)?
No, certain gifts are exempt from tax under Section 56(2)(vii), including gifts received from relatives, gifts received on the occasion of marriage, gifts received under a will or inheritance, and gifts received in contemplation of death.
4. Who is liable to pay tax on gifts received under Section 56(2)(vii)?
The person who receives the gift is liable to pay tax on the value of the gift received.
5. How is the value of the gift determined under Section 56(2)(vii)?
The value of the gift is determined based on the fair market value of the asset on the date of the gift.
6. Are gifts received from friends or acquaintances taxable under Section 56(2)(vii)?
Yes, gifts received from friends, acquaintances, or even strangers are taxable if they exceed Rs. 50,000 in a financial year.
7. Is there any exemption available for gifts received by trusts or institutions?
Yes, gifts received by a trust or institution registered under section 12AA of the Income Tax Act are exempt from tax under Section 56(2)(vii).
8. Is there any penalty for not disclosing gifts received while filing income tax returns?
Yes, failure to disclose gifts received while filing income tax returns can attract penalties and legal action by the tax department.
9. Can gifts received from relatives be used to evade tax liabilities?
No, while gifts received from relatives are exempt from tax under Section 56(2)(vii), they cannot be used to evade tax liabilities.
10. Are there any recent amendments to Section 56(2)(vii)?
Yes, the government has introduced several amendments to Section 56(2)(vii) over the years, including exemptions on gifts received from specified relatives and the introduction of fair market value for the valuation of assets received as gifts.
