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Avoid gifting a burden! Here's how

Last updated on: December 21, 2009 13:50 IST

Avoid gifting a burden! Here's how


Meenakshi Subramaniam in Mumbai

Do you want an apartment or car as Christmas gift, your closest buddy asks. Plump wisely for your present. As new gifting rules have been introduced from October 1, take care to avoid the taxman's trap this festival season. A building is taxed, not a car.

Giving gifts and getting gifts must be planned properly. The first thing to remember is that the donee (receiver of gift) is taxed. Therefore, don't choose a present that could land your friend in tax trouble. For example, if jewellery worth Rs 55,000 is gifted to an individual in the highest income bracket, she may have to pay in the vicinity of Rs 16,000 as tax. At the same time, try not to accept gifts that add to your tax burden.

The second thing is that gifts in kind, like land and buildings, shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures and any work of art received from non-relatives, say friends, acquaintances and business partners, which exceed Rs 50,000 are now taxed. Previously, only gifts in cash came under the ambit of tax.

How can festival time be enjoyed, exchanging gifts, without looking over the shoulder for taxman tapping? Read on.

Click on NEXT to read further.

Image: A man dressed as Santa Claus distributes gift upon his arrival, from his village in the artic circle of Finnish Lapland, at Beirut international airport.
Photographs: Mohamed Azakir/Reuters

Avoid gifting a burden! Here's how

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Choosing Gifts

Gold necklace as gift? Instead, tell your friend that raw gold would be fine or gold coins or biscuits are also fine. The tax is on 'jewellery', so these gifts do not come under the purview of new rules. Precious metal stones are also unencumbered by tax. Utensils of gold and silver are a great proposition, as they don't attract tax. Similarly, shares are no longer safe gifts, mutual funds are.

Though paintings are considered taxable gifts, presents of furniture are not considered 'work of art,' and, hence, are gifting material.

Cars, computers, LCD TVs, high-tech mobiles, kitchen gadgets, holiday packages are gifts, which are free from tax. The whole gamut of electronic goods, vehicles, travel can be explored. Apparel, sewn with semi-precious stones, are okay. One can also make gifts of provisions throughout the year.

See the FMV angle

Don't go for gifts that lead to fair market valuation (FMV)questions. For example, if a painting is Rs 2 lakh, but FMV is Rs 5 lakh, tax would be charged on the higher amount of Rs 5 lakh. Gifts like property, works of art and unlisted shares should be avoided, as they involve FMV issues. Gold, precious metals and shares, however, have no such valuation problems. Their value is fixed and ascertainable.

Image: A shopkeeper shows gold bangles to a prospective buyer at a jewellery shop in Mumbai.
Photographs: Arko Datta/Reuters
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Avoid gifting a burden! Here's how

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The right relatives

Not all are considered relatives, according to gifting tax rules, though they are related. A cousin is not a relative. An uncle can give a gift with no tax complications but a nephew can't offer him a present. A daughter-in-law is not a relative. The father-in-law is no relative, either.

An HUF's (Hindu Undivided Family's) gift is taxed, but if an AOP (Association of Persons) or Trust gives gifts, they are safe.

How to shower affection

If giving gifts, pick family members whose tax liability is nil. That is, their income is below the taxable limit. As it is, they won't be taxed. On the other hand, your income would be lesser, reducing tax incidence. If there is only one earning member in the family, this is a tax strategy that can be adopted ideally.

Parents can gift financial instruments like National Savings Certificates and Kisan Vikas Patras to minor children, if they are just short of 18 years. The income would not be clubbed. The whole amount would become separate money for the children as soon as they turn 18.

There is one way to give a gift to the daughter-in-law, too. She can be gifted money with which she can join a firm as partner. The interest would be assessed in her name, under a separate return.

Image: A shopping mall employee gift-wraps a perfume in Frankfurt.
Photographs: Johannes Eisele/Reuters
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Claim cleverly

The rules say that where gifts in aggregate exceed Rs 50,000 from non-relatives, the tax mechanism springs into action. But, a deep reading of the act shows that an intelligent assessee can claim three separate exemptions, each amounting to Rs 50,000. He can show gifts under three heads, namely, cash, immovable property and other assets. Under each head, he can claim Rs 50,000 exemption. Thus, he can easily get Rs 1,50,000 total exemption.

Don't accept a gift amounting to Rs 50,001, as one extra rupee can upset all tax plans. The entire amount of Rs 50,001 is then added to income and taxed at the rate applicable that year.

Gifts from office

A gift voucher below Rs 5,000 per annum received from the office is not taxed. Otherwise, it bears the full brunt of tax. As Fringe Benefits Tax has passed on to employees, gifts are taxed in their hands. The rate has also increased. For a gift of Rs 15,000, the FBT which was Rs 2,550 has now been hiked to Rs 4,635. As the bonus is not taxed so heavily, an employee must prefer this gift.

Presents and proof

Whenever a present is received, the gift cheque must be examined to see whether it's crossed and account payee. For big presents, a gift deed is essential. It must carry stamp duty, if the gift is a land. For products, the cash memo must be given to the donee, so that he doesn't face awkward questions.

Finally, if one fails to show an expensive gift, interest has to be paid and a stern punishment awaits defaulter. He has to pay up to three times more tax than what is supposed to be paid on income from the gift.

A plane as gift? Sure. Go ahead and press the throttle. There's no tax on this winged beauty.

Image: Customers look for gifts ahead of Valentine's Day celebrations in shop in Ahmedabad.
Photographs: Amit Dave/Reuters
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