Introduction:
Section 56(2)(viib) of the Income Tax Act was introduced in the year 2017 as part of the amendments made to the Act. It deals with the taxation of gifts received by an individual or a Hindu Undivided Family (HUF). This provision has brought about significant changes in the way gifts are taxed in India. In this blog, we will discuss the provisions of section 56(2)(viib) in detail, along with its impact and applicability.
Understanding Section 56(2)(viib):
Section 56(2)(viib) of the Income Tax Act states that if an individual or an HUF receives any sum of money or property without consideration, the value of such money or property will be treated as income and taxed under the head ‘Income from other sources.’ This provision applies to gifts received from any person, except for relatives and on certain specified occasions.
Exceptions to Section 56(2)(viib):
The provisions of section 56(2)(viib) do not apply to gifts received from relatives. The term ‘relative’ has been defined in the Act and includes spouses, siblings, parents, grandparents, grandchildren, and lineal descendants. The provision also does not apply to gifts received on certain occasions like marriage, inheritance, etc. Gifts received from trusts and charitable institutions are also exempt from the purview of section 56(2)(viib).
Impact of Section 56(2)(viib):
Section 56(2)(viib) has brought about a significant change in the taxation of gifts in India. Earlier, gifts received by individuals and HUFs were taxed under the head ‘Income from other sources’ if the value of the gift exceeded Rs. 50,000. However, the provision did not apply to gifts received from relatives.
With the introduction of section 56(2)(viib), the provision has been expanded to cover gifts received from any person, except for relatives and on certain specified occasions. This means that all gifts received by individuals and HUFs, except for those covered under the exceptions, will be taxed as income.
Applicability of Section 56(2)(viib):
Section 56(2)(viib) applies to all individuals and HUFs who receive gifts without consideration. The provision applies to gifts received on or after April 1, 2017. It is important to note that the provisions of section 56(2)(viib) do not apply to gifts received before April 1, 2017.
While discussing section 56(2)(viib), there are some additional details that are worth considering. These include:
Valuation of Gifts:
The value of gifts received by an individual or HUF without consideration is taxable under section 56(2)(viib). However, it is essential to determine the fair market value of the gift for the purpose of taxation. In the case of immovable property, the fair market value will be determined based on the stamp duty value of the property. In the case of movable property, the fair market value will be determined based on the actual market value of the property.
Tax Rate:
The value of gifts received without consideration is taxable under the head ‘Income from other sources.’ The tax rate applicable to this income will be as per the tax slab applicable to the individual or HUF. The tax rates are subject to change from time to time as per the changes made in the Finance Act.
Reporting of Gifts:
It is essential for individuals and HUFs to report gifts received without consideration in their income tax returns. The details of the gifts received need to be reported in the relevant schedules of the income tax return. Non-disclosure of gifts received can attract penalties and legal consequences.
Exemptions:
Apart from the exemptions provided under section 56(2)(viib), there are some other exemptions available for gifts received by individuals and HUFs. Gifts received from certain specified entities like the government, local authority, etc., are exempt from tax. Gifts received by an individual from a registered trust or institution for educational or medical purposes are also exempt from tax.
Impact on Gift-Giving Culture:
Section 56(2)(viib) has had a significant impact on the gift-giving culture in India. Earlier, gifts were often used as a means of evading taxes, and people would often resort to giving gifts to avoid paying taxes. However, with the introduction of this provision, people are now more cautious about giving gifts as they are aware that gifts above a certain value are subject to tax.
As a result, the culture of gift-giving has undergone a change, and people are now more conscious of the tax implications of giving gifts. People are also more likely to give gifts on occasions that are exempted under the provision, like marriages, inheritances, etc. This has resulted in greater transparency in the taxation of gifts and has helped in curbing the practice of tax evasion.
Impact on Compliance:
Section 56(2)(viib) has also had an impact on compliance with the income tax laws. With the provision coming into force, individuals and HUFs are now more likely to disclose gifts received in their income tax returns to avoid any penalties or legal consequences.
The provision has also made it easier for the tax authorities to track gifts received by individuals and HUFs. The tax authorities can now compare the gifts received with the income disclosed in the income tax returns to ensure that there is no evasion of tax.
Impact on Tax Revenue:
Section 56(2)(viib) has had a positive impact on tax revenue. The provision has brought about greater transparency in the taxation of gifts, and people are now more likely to disclose gifts received in their income tax returns. This has resulted in an increase in tax revenue for the government.
The provision has also helped in curbing the practice of tax evasion through the route of gifts, resulting in a more equitable distribution of tax burden among taxpayers.
Conclusion:
Section 56(2)(viib) of the Income Tax Act has brought about a significant change in the taxation of gifts in India. It has expanded the scope of taxation to cover gifts received from any person, except for relatives and on certain specified occasions. The provision has brought about greater transparency in the taxation of gifts and has helped in curbing the practice of tax evasion through the route of gifts. It is important for individuals and HUFs to understand the provisions of section 56(2)(viib) and ensure compliance with the same to avoid any penalties or legal consequences.
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Frequently Asked Questions (FAQs)
- What is section 56(2)(viib) of the Income Tax Act?
Section 56(2)(viib) of the Income Tax Act is a provision that taxes gifts received by individuals and Hindu Undivided Families (HUFs) without consideration if the value of the gift exceeds Rs. 50,000 in a financial year.
2. What is the tax rate applicable to gifts received under section 56(2)(viib)?
The value of gifts received without consideration is taxable under the head ‘Income from other sources.’ The tax rate applicable to this income will be as per the tax slab applicable to the individual or HUF.
3. Is there any exemption available for gifts received under section 56(2)(viib)?
Yes, there are certain exemptions available for gifts received by individuals and HUFs. Gifts received on occasions like marriage, inheritance, etc., are exempt from tax.
4. How is the value of gifts determined for the purpose of taxation under section 56(2)(viib)?
The fair market value of the gift is determined for the purpose of taxation under section 56(2)(viib). In the case of immovable property, the fair market value will be determined based on the stamp duty value of the property. In the case of movable property, the fair market value will be determined based on the actual market value of the property.
5. Do I need to disclose gifts received under section 56(2)(viib) in my income tax return?
Yes, it is essential to report gifts received without consideration in the relevant schedules of the income tax return. Non-disclosure of gifts received can attract penalties and legal consequences.
6. Is there any penalty for non-disclosure of gifts received under section 56(2)(viib)?
Yes, non-disclosure of gifts received without consideration can attract a penalty of up to 50% of the value of the gift.
7. Are gifts received from relatives taxable under section 56(2)(viib)?
Gifts received from relatives are exempt from tax under section 56(2)(viib). Relatives include spouse, brother or sister, brother or sister of the spouse, brother or sister of either of the parents, any lineal ascendant or descendant, etc.
8. Are gifts received from friends or acquaintances taxable under section 56(2)(viib)?
Yes, gifts received from friends or acquaintances are taxable under section 56(2)(viib) if the value of the gift exceeds Rs. 50,000 in a financial year.
9. Is there any limit on the number of gifts that can be received without tax implications under section 56(2)(viib)?
No, there is no limit on the number of gifts that can be received without tax implications under section 56(2)(viib). However, the value of the gift should not exceed Rs. 50,000 in a financial year.
10. Can gifts received by a company or a firm be taxed under section 56(2)(viib)?
No, gifts received by a company or a firm are not taxable under section 56(2)(viib). The provision applies only to gifts received by individuals and HUFs.
