Tax for NRIs on gifts of money and property from resident Indians received through gift deeds

Tax for NRIs on gifts of money and property from resident Indians received through gift deeds

Gifts in India are taxable under the Income Tax Act. Gift can be in cash or kind (moveable or immoveable property and other assets specified under the Act). A resident Indian can make a gift to an NRI through a gift deed, but there is a claim on gifts received by NRI.

NRIs are taxed for income that arises in India or is received or accrued in India or deemed to have arisen, received, or accrued in India.

A gift to an NRI by the way of gift deed from a relative is not income and thus not chargeable to tax. Gifts in excess of Rs 50,000/- are subject to tax if gifted by a non- relative. There are certain other exemptions. No tax is payable if a gift is given in contemplation of the recipient’s marriage, death of the donor, or under a Will or inheritance.

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Gift by Remittance

In case of a gift by remittance from a resident Indian, it was not taxed as the transaction is completed in a foreign country bank account where the NRI receives the money. This income is neither received in India nor accrued in India, therefore, not liable for taxation. The gift of money made to NRI was not charged for tax. There is no claim on such gifts received by NRI.

Under the scheme called Liberalized Remittance Scheme (LRS), a resident Indian can remit amount up to $250,000 a year for various purposes like gift, donation, maintenance of close relatives, etc.

Loopholes in Gift Deed

A resident can remit to an NRI even if he is not a relative. And there is no claim on such gifts received by an NRI through gift deed. Taking advantage of the same, many rich people in India used to transfer by way of gift a considerable amount of money to NRIs and avoid tax on their taxable income.

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Now there is an amendment in the rule. It says that the sum of money received by a person outside India from a resident, without any consideration, is deemed to accrue or arise in India. Thus, the gift of money received by a person outside India by way of remittance from a resident would be taxable in India. But if the donor is a relative, remittance is not taxable i.e., no claim on this gift received by NRI if he is a relative of donor.

The amendment is only for the gift of money and not property. Accordingly, if the property situated in India is transferred to an NRI by way of gift through a gift deed, tax is payable by NRI if the value of such a gift is more than Rs 50,000/-.

Gift Taxation Rules

A person outside India means a non-resident or a foreign company. All the money transfers without any consideration on or after July 5, 2019, will be treated as taxable from FY 2019-20.

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Thus for Gift taxation purposes, the place where the gift originated becomes significant rather than the destination.

An NRI has to file his income tax return in India and disclose his income from all the Gifts received. NRIs are now included as income tax assesses and liable for a claim on the gifts received by them through a gift deed.

However, if India has signed a double taxation avoidance treaty with the country of the recipient, the relevant clause will apply. In such a case, the tax may not be payable.

As a top lawfirm in India, we offers a wide array of services to individuals as well as organizations in matters of taxation in India. All the tax issues faced by NRIs are handled by our premier legal management firm.

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Transfer by Gift deed is not taxable

Transfer by Gift deed is not taxable

Gifts transactions are not taxable in the hands of the donor. For a donee, the gift deed transfer is taxable, but there are exceptions. 

Gifts are prevalent among family members or close relatives. It is one way of expressing love and affection. People also make gifts to save taxes as some of the Gift transactions are fully exempted from taxation.

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A person may gift any of the following:

A person may be an individual, HUF or an artificial juridical person like a company/firm. 

In India, we had a Gift Tax Act under which tax was levied on the gift. The donor had to pay the tax. But the said legislation was abolished. Now a provision has been made in the Indian Income Tax Act 1961, for taxing the gift transactions. The recipient of the gift has to pay tax. 

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The gift transaction is tax-free under certain circumstances: 

Gift of Cash:

If the aggregate value of the cash received in gift exceeds Rs 50,000 in a financial year, the recipient has to pay the tax on the amount received. The said amount is counted as his income under the head Income from other sources.

Read More: Tax for NRIs on gifts of money and property

Gift of property:

  • The gift deed of immovable property has to be registered. The stamp duty is paid at the time of registration based on the market value of the property. The stamp duty payable differs from state to state.
  • If the property is received as a gift without consideration, the recipient pays the tax if the stamp duty value of the property exceeds Rs 50,000/-.
  • If the property is received without adequate consideration, the recipient pays the tax if the stamp duty value exceeds consideration amount by Rs 50,000/-. 
  • In the case of moveable property like shares, jewellery, etc., the recipient pays the tax if the fair market value of the property exceeds Rs 50,000/-.

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Some gifts are tax-free:

  • Any amount of gift if received from the relatives as defined in the Income Tax Act. A relative is specified in the Act and can be the spouse, sibling, sibling of the spouse, sibling of either parent, etc.
  • For NRIs and PIOs, the rules of FEMA will also apply. The definition of relatives is narrower under FEMA. For NRIs as a recipient, rules of remittance have to be kept in mind. The resident Indian who wants to gift an amount to an NRI, the said amount cannot exceed the permissible limits of remittance. 
  • Gift received on the occasion of marriage.
  • Gift received under Will or inheritance
  • Gift on the contemplation of death of the donor
  • Gifts received from any fund, foundation, medical institution, educational institution or university, or any charitable or religious trust. Gifts received from any person by the said institutions are also exempted. Such foundation, institution etc. must be registered under the Income Tax Act.

A person can use provisions relating to gifts for tax planning. These are certainly not meant for evading taxes. 

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CAN A GIFT DEED BE CHALLENGED IN INDIA

CAN A GIFT DEED BE CHALLENGED IN INDIA

Yes. A Gift deed being an instrument for transferring the rights in the property can be challenged in India.

Gift:                A gift is a gratuitous transfer of property by a donor to a donee voluntarily.

Gift Deed:     A legal document describing the transfer of property. A gift deed is an agreement between the two parties (donor and donee) for transfer of right in the property.

Essentials to make a gift valid:

  • Property: The property to be gifted can be moveable or immovable. It must be an existing property. Future property cannot be transferred
  • Acceptance of gift: The gift has to be accepted by the donee or on his behalf. If the gift is not accepted during the lifetime of the donor, it is invalid. If the donee dies without accepting the gift, it becomes void.
  • Parties must be competent to contract: Donor has to be a person capable of making a contract.  A minor cannot be a donor. However, a minor can be a donee. In such a case, the gift has to be accepted by a guardian on his behalf.
  • Consideration:  There is no consideration in gift. There can be a conditional gift such that the condition is not based on donor’s will or pleasure. The conditional gifts are incomplete until conditions are complied with. 
  • Voluntarily: Gift has to be made with free consent. Free consent implies the absence of :
  • Fraud
  • Coercion
  • Misrepresentation
  • Undue influence
  • Registration: A gift deed made for transferring immovable property has to be registered compulsorily as per The Registration Act, 1908.  The gift deed has to be signed by the parties and attested by two witnesses.

When we gift any moveable property, gift deed is not mandatory. The gift deed even if made, may or may not be registered but delivery and acceptance is a must.

Grounds for challenging the Gift Deed:

A gift deed can be challenged if any of the above mentioned legal requirements for making a gift transaction valid have not been complied with, like:

  • Consent was not free.
  • Gift deed not executed and registered as per legal provisions
  • Parties not competent to contract
  • Consideration is present.
  • Acceptance not made
  • If the gift is conditional and the condition is not fulfilled, gift deed can be revoked.

Revocation of gift deed:

  • Gift deed can be revoked by the donor for any legally valid reason as available for rescinding the contract.
  • Revocation by agreement – Donor and donee may agree at the time of making the gift that the gift can be revoked on the happening of an event which is not dependent on the will of the donor. The condition for revoking the gift should be made clear to the donee at the time of executing the gift deed. The unilateral revocation of the gift is not possible.
  • If the gift is incomplete and the title remains with the donor, the gift deed can be cancelled by the donor.

When to file suit for cancellation of gift deed:

A civil suit for cancellation of a gift deed can be filed within three years of coming to the knowledge of the fact that there exists a ground to challenge the gift deed.

A gift deed can also be cancelled by executing a cancellation deed if both parties agree.

How to Make Gift Deed in Gujarat?

How to Make Gift Deed in Gujarat Front

An owner of the property can transfer the same in many ways like Will, Gift or Sale.

Among family and friends, the property is usually transferred by way of executing a Gift Deed. 

The process of Gift deed creation is generally the same in all the States of India. There are certain requirements which are specific to each state, e.g. the criteria for imposing Stamp duty varies from State to State. The difference is there in stamp duty, and registration charges as States can charge Stamp duty and registration fees as per their revenue requirement.

For Gift deed in favour of blood relations, most of the States charge nominal Stamp duty and registration fees. In some states, there is a complete waiver also.

Read: Tax for NRIs on gifts of money and property

The process of gift deed creation requires:

  • Drafting of gift deed on stamp paper- In the drafting of Gift deed, the value of stamp paper depends upon the value of the property to be gifted. The gift deed must mention that gift is being made voluntarily and without any consideration. The donor must be solvent.
  • Signature of donor and donee on the deed – signature of the donee on the deed signifies the acceptance of the gift by the done which is necessary to make the gift valid. Acceptance of gift must be made during the lifetime of the donor otherwise the gift is rendered invalid.
  • Attestation by witnesses
  • Payment of stamp duty and registration charges

Under section 17 of the Registration Act 1908, registration of a Gift Deed is compulsory.  The stamp duty and the registration charges payable in each State are different and therefore, it is better to consult a local lawyer for making a gift deed.

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Moveable property can be gifted without any deed. Delivery and acceptance of the moveable property complete the gift transaction.

In the State of Gujarat:

  • Stamp duty payable is governed by the Bombay Stamp Act, 1958 as applicable to the State of Gujarat.
  • Stamp duty payable is 3.5 % of the market value of the property being gifted.
  • Surcharge @ 1% is also applicable over the stamp duty basic rate
  • Registration charges are paid in addition to the stamp duty.

Stamp duty payable depends upon the value of the property to be gifted. Valuation of property should be carried out by experts in the field to calculate the correct stamp duty.

In the state of Gujarat:

  • Draft models of gift deed are present on the official website, in English as well as the Gujarati language.
  • Property can be registered online also.
  • There is a provision for e-payment of Stamp duty and registration charges.

Since the registration of the deed of immovable property is mandatory, unregistered deed is not recognised in law. Therefore, it is advisable to register it as per the prevalent State Laws. In case, the gift deed of immovable property is not registered, the title does not pass to the donee. For Registration, the Gift deed is presented to the office of the local Sub -Registrar within whose territorial jurisdiction, the property or a portion of the property to be gifted lies.

Important points: In the State of Gujarat –

  • There is a penalty of 200% of the value of the gift deed executed, for evading stamp duty.
  • After GST, there is no impact on stamp duty and registration fees.