Gifts and Receipts Without or Below Adequate Consideration

Understand Gifts and Receipts Without or Below Adequate Consideration

Key rules to remember

Money received without consideration

Taxable = total money received in the tax year, if total > ₹50,000; otherwise nil

Aggregate all non-exempt receipts of money from all persons. If the total crosses ₹50,000, the whole total is taxed.

Immovable property received without consideration

Taxable = stamp duty value of the property, if that value > ₹50,000; otherwise nil

Applies to land or building held as a capital asset by the receiver. The stamp duty value is taxable if it exceeds ₹50,000.

Immovable property for inadequate consideration

Taxable = stamp duty value − consideration, if the difference > higher of ₹50,000 and 10% of consideration; otherwise nil

If the limit is crossed, the whole difference is taxed, not only the excess over the limit.

Specified movable property without consideration

Taxable = aggregate FMV, if aggregate FMV > ₹50,000; otherwise nil

Covers shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures, works of art and bullion. The FMV of these items is aggregated and compared with ₹50,000.

Specified movable property for inadequate consideration

Taxable = aggregate FMV − aggregate consideration, if the difference > ₹50,000; otherwise nil

The test is on the aggregate of all such property received in the tax year, not item by item. There is no 10% tolerance for movable property. Only the ₹50,000 limit applies.

Date for stamp duty value (agreement rule)

Use stamp duty value on the date of agreement, if the consideration (or part) was paid by account payee cheque/draft, bank electronic mode or other prescribed mode on or before that date

Otherwise use the value on the date of registration.

Meaning of relative (for an individual)

Spouse; brother or sister; brother or sister of spouse; brother or sister of either parent; lineal ascendant or descendant; lineal ascendant or descendant of spouse; and the spouse of each of these persons

For a HUF, any member of the family is a relative. Cousins and friends are not relatives.

How to solve Gifts and Receipts Without or Below Adequate Consideration questions

1. 1List every receipt in the tax year: money, immovable property, specified movable property. Note the giver and the occasion.
2. 2Drop receipts that are not covered, such as a car, furniture or any other movable not on the specified list.
3. 3Test each receipt for exemption: relative, marriage of the receiver, will or inheritance, contemplation of death, local authority, approved fund or trust, and other listed cases. Remove exempt receipts.
4. 4Fix the value. Use stamp duty value for immovable property (check the agreement date rule) and FMV for movable property.
5. 5Classify each receipt as without consideration or inadequate consideration, and find the amount to test (full value, or value minus consideration).
6. 6Apply the limit. For money, add the receipts for the year and compare with ₹50,000. For free immovable property, compare the stamp duty value with ₹50,000. For free movable property, add the FMV and compare with ₹50,000. For inadequate consideration of movable property, compare the aggregate FMV less the aggregate consideration with ₹50,000. For inadequate consideration of immovable property, compare the difference with the higher of ₹50,000 and 10% of consideration.
7. 7If the limit is crossed, tax the whole amount under Income from Other Sources. If not, the taxable amount is nil.
8. 8Add the taxable amount to total income, and note that it becomes the cost of acquisition of the asset for later capital gains.

Quickest way: Exempt, value, limit: three-pass check

Common mistakes in Gifts and Receipts Without or Below Adequate Consideration

• Taxing only the excess over ₹50,000.

  Students treat the limit like a deduction or exemption slab.

  Fix: Remember it is a threshold. Once crossed, the whole amount is taxed. A total of ₹55,000 gives ₹55,000, not ₹5,000.

• Treating a cousin, friend or uncle's spouse as a relative.

  The everyday meaning of relative is wider than the list in the Act.

  Fix: Check the person against the statutory list. Cousins and friends are outside it. A brother or sister of your parent, and that person's spouse, are inside it.

• Using market value instead of stamp duty value for immovable property.

  Students use the figure in the question that looks like a price.

  Fix: Use stamp duty value for land or building. Use FMV only for specified movable property. Apply the agreement date rule if payment was made by banking mode on or before the agreement.

• Applying the 10% tolerance to shares or jewellery.

  The tolerance is learned for immovable property and carried over to all property.

  Fix: For movable property the only test is whether the difference exceeds ₹50,000. The 10% tolerance is only for immovable property.

• Taxing a gift of a car, furniture or a plot held as stock-in-trade.

  Students assume that all property gifts are covered.

  Fix: Check the list. Only specified movable property is covered. Immovable property counts only if it is a capital asset in the receiver's hands.

• Ignoring the occasion, such as taxing a marriage gift received by the bride or groom.

  Students look only at the giver, not the event.

  Fix: A receipt on the marriage of the individual is exempt from anyone, with no limit. A gift on someone else's marriage, or on a birthday or anniversary, is not covered by this exemption.

Worked examples