Section 56(2)(x) of the Income Tax Act, 1961 is a provision that deals with the taxability of certain receipts under the head of ‘Income from other sources’. This provision has been introduced to curb the practice of receiving gifts, which were being used as a means to evade tax.
Under this section, any sum of money or property received without consideration or for inadequate consideration, by an individual or Hindu Undivided Family (HUF), is deemed to be income and is taxable in the hands of the recipient. Let us understand the provisions of this section in detail.
Applicability of Section 56(2)(x) This provision is applicable to individuals and HUFs who receive any sum of money or property without any consideration or inadequate consideration. However, this section does not apply in certain situations, such as:
- When the sum of money or property is received from a relative, i.e. spouse, brother or sister, brother or sister of the spouse, brother or sister of either of the parents, any lineal ascendant or descendant, or spouse of any of the aforementioned relatives.
- When the sum of money or property is received from a local authority, as defined under Article 243(Q) of the Constitution.
- When the sum of money or property is received from any fund or foundation or university, or other educational institution or hospital, or other medical institution, or any trust or institution, which is registered under Section 12AA of the Income Tax Act.
Taxability of sum of money or property Under Section 56(2)(x), any sum of money or property received without consideration or for inadequate consideration, is deemed to be income of the recipient and is taxable under the head ‘Income from other sources’. The value of the sum of money or property received is determined as per the fair market value of such sum of money or property.
For example, if an individual receives a gift of Rs. 5 lakh from his friend, which is not covered under any of the exceptions mentioned above, then the entire amount of Rs. 5 lakh will be taxable as ‘Income from other sources’ in the hands of the recipient.
Inadequate consideration The term ‘inadequate consideration’ means any consideration which is less than the fair market value of the property. For example, if an individual sells a house worth Rs. 1 crore to his friend for Rs. 50 lakh, then the difference of Rs. 50 lakh will be considered as ‘inadequate consideration’ and will be taxable under this section.
Penalty for non-disclosure If an individual fails to disclose any sum of money or property received without consideration or for inadequate consideration, then he will be liable to pay a penalty under Section 271(1)(c) of the Income Tax Act. The penalty amount can be up to 300% of the tax payable on such income.
Exceptions to the Rule
As mentioned earlier, there are a few exceptions to this rule. One of them is receiving a sum of money or property from a relative. The term “relative” is defined under Section 56(2)(x) and includes a spouse, brother or sister, brother or sister of the spouse, brother or sister of either of the parents, any lineal ascendant or descendant, or spouse of any of the aforementioned relatives.
Another exception is when a sum of money or property is received from a local authority, as defined under Article 243(Q) of the Constitution. This refers to the powers and functions of a panchayat or a municipality.
Lastly, if a sum of money or property is received from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution, which is registered under Section 12AA of the Income Tax Act, then it is exempt from tax.
Taxability of Gifts
Section 56(2)(x) specifically mentions the taxability of gifts. However, it does not differentiate between cash or kind gifts. Hence, any gift received without consideration or for inadequate consideration is taxable under this section.
Fair Market Value
The value of the sum of money or property received is determined as per the fair market value of such sum of money or property. The term “fair market value” is not defined under the Income Tax Act. However, it is generally understood to mean the price that a willing buyer would pay to a willing seller in an arm’s length transaction.
Penalty for Non-Disclosure
If an individual fails to disclose any sum of money or property received without consideration or for inadequate consideration, then he will be liable to pay a penalty under Section 271(1)(c) of the Income Tax Act. The penalty amount can be up to 300% of the tax payable on such income. Hence, it is advisable to disclose any such receipts and pay the applicable tax to avoid any penalty.
Conclusion
Section 56(2)(x) of the Income Tax Act is an important provision that aims to curb the practice of receiving gifts to evade tax. It is applicable to individuals and HUFs who receive any sum of money or property without any consideration or for inadequate consideration. Such receipts are deemed to be income of the recipient and are taxable under the head ‘Income from other sources’. It is important for individuals to disclose such receipts and pay the applicable tax to avoid any penalty.
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Frequently Asked Questions (FAQs)
Q: What is Section 56(2)(x) of the Income Tax Act?
A: Section 56(2)(x) of the Income Tax Act deals with the taxation of gifts received without consideration or for inadequate consideration.
Q: Who is liable to pay tax under Section 56(2)(x)?
A: Individuals and Hindu Undivided Families (HUFs) who receive any sum of money or property without any consideration or for inadequate consideration are liable to pay tax under Section 56(2)(x).
Q: What is considered a gift under Section 56(2)(x)?
A: Any sum of money or property received without consideration or for inadequate consideration is considered a gift under Section 56(2)(x).
Q: What is the rate of tax applicable on gifts under Section 56(2)(x)?
A: The rate of tax applicable on gifts under Section 56(2)(x) is the same as the rate of tax applicable on the recipient’s total income. The tax is levied under the head ‘Income from other sources’.
Q: Are there any exceptions to the taxability of gifts under Section 56(2)(x)?
A: Yes, there are a few exceptions to the taxability of gifts under Section 56(2)(x). These include gifts received from a relative, gifts received from a local authority, and gifts received from registered funds or foundations, universities, educational institutions, hospitals, or other medical institutions.
Q: What is the fair market value of a gift?
A: The fair market value of a gift is the price that a willing buyer would pay to a willing seller in an arm’s length transaction.
Q: What is the penalty for non-disclosure of gifts received under Section 56(2)(x)?
A: If an individual fails to disclose any gift received without consideration or for inadequate consideration, then he will be liable to pay a penalty under Section 271(1)(c) of the Income Tax Act. The penalty amount can be up to 300% of the tax payable on such income.
Q: Do I need to disclose gifts received from relatives under Section 56(2)(x)?
A: No, gifts received from relatives as defined under Section 56(2)(x) are exempt from tax and do not need to be disclosed. However, it is always advisable to maintain proper records of all gifts received to avoid any confusion or penalty.
