Understanding Gift Taxation Under Section 56(2)(x): A Donee-Centric Approach

The Gift-tax Act, 1958, originally governed the taxation of gifts in India. Under this legislation, the tax liability rested with the donor — the person giving the gift. Any taxable gift made by a donor to another person attracted gift tax, which was payable by the donor. This Act applied to all types of property transfers made without consideration, whether in cash or kind. However, over time, the administrative burden and complexities associated with implementing the Gift-tax Act led to its eventual abolition. The Government of India repealed the Gift-tax Act in 1997, eliminating donor-based gift taxation. This repeal left a vacuum in the tax law, creating potential avenues for tax avoidance through unregulated gifting.

Introduction of Donee-Based Gift Taxation by the Finance (No. 2) Act, 2004

In response to concerns about money laundering and tax evasion, the Finance (No. 2) Act, 2004, introduced a new regime of donee-based taxation. The focus shifted from the donor to the recipient of the gift. The Finance Minister, in his Budget Speech of 2004, highlighted the need to plug loopholes that were being exploited under the earlier regime. Specifically, gifts from unrelated persons above a threshold of ₹25,000 were targeted as potential vehicles for laundering money or transferring untaxed wealth. To curb this practice, a new provision was inserted in the Income-tax Act, 1961. Under this provision, any sum of money exceeding ₹25,000 received without consideration by an individual or Hindu Undivided Family (HUF) from a non-relative became taxable as income in the hands of the recipient. However, gifts from close relatives and gifts received on specific occasions, such as marriage, continued to remain exempt.

Amendment by the Taxation Laws (Amendment) Act, 2006

The initial threshold of ₹25,000 per transaction gave rise to fragmentation of gifts to avoid tax liability. To counter this manipulation, the Taxation Laws (Amendment) Act, 20,0,6, revised the threshold provision. With effect from 1st April 2006, a new clause (vi) was inserted into section 56(2) of the Income-tax Act. The amendment replaced the per-transaction limit of ₹25,000 with a consolidated limit of ₹50,000 for the entire financial year. This change meant that all cash gifts received during a year would be aggregated. If the total amount exceeded ₹50,000, the entire sum—not just the excess—would become taxable as income from other sources. This amendment reflected the intent to prevent abuse through split transactions and strengthened the donee-based taxation regime.

Expansion to Gifts in Kind by the Finance (No. 2) Act, 2009

Until 2009, only monetary gifts were covered under the donee-based taxation scheme. However, there remained a major gap in the law—gifts of property or other non-cash assets were not subject to tax. To address this, the Finance (No. 2) Act, 2009, introduced clause (vii) to section 56(2), effective from 1st October 2009. This clause expanded the scope of taxation to include not just cash gifts but also immovable property and specified movable property received without consideration or for inadequate consideration. Specified movable properties included jewellery, shares, securities, paintings, sculptures, and similar items of value. The amendment ensured that these types of gifts could no longer escape tax simply because they were not in the form of money.

Further refinement came in the Finance Act, 2010, which included bullion within the definition of property. This addressed another loophole, as individuals were transferring high-value bullion to others as untaxed gifts.

In a notable case, the Mumbai Tribunal in Assistant Commissioner of Income-tax v. Shahrukh Khan held that a villa received by the assessee from a foreign company could not be taxed under section 28(iv), as there was no element of professional service involved. However, since section 56(2)(vi) applied only to cash gifts during the relevant period, the villa was not taxed. This underscored the need for legislative clarity and led to further amendments ensuring gifts in kind could be brought under the tax net under section 56(2)(vii) or 56(2)(x).

Extension to Firms and Closely Held Companies by Finance Act, 2010

Despite the widening scope of the donee-based gift tax, there remained significant exclusions. The law at that point applied only to individuals and HUFs. Firms, companies, associations of persons (AOPs), and bodies of individuals (BOIs) were not covered under the gifting provisions for general property and cash. This allowed for tax avoidance, particularly through the transfer of unlisted shares at prices much below their fair market value to firms and closely held companies.

To counteract this, the Finance Act, 2010, inserted clause (viia) in section 56(2), targeting transfers of unlisted shares. Under this clause, if a firm or private company received shares of another private company either without consideration or for inadequate consideration, the difference between the fair market value and actual consideration would be taxable in the hands of the recipient. This amendment was a targeted anti-abuse measure focusing on a specific category of transactions. However, it still left a wider category of gifts outside the tax ambit when received by non-individual assessees.

Universal Application of Donee-Based Taxation by Finance Act, 2017

By 2016, it was evident that the existing framework of donee-based taxation had limited reach. While some clauses applied to individuals, HUFs, and certain firms and companies, gifts to AOPs, BOIs, and other artificial juridical persons continued to escape tax. The decision in the case of Mridu Hari Dalmia Parivar Trust v. Assessing Officer, where gifts received by an AOP were held outside the purview of section 56(2)(vii), highlighted the need for a uniform taxation rule.

To implement a universal gifting tax regime, the Finance Act, 2017 substituted earlier clauses with a new provision—section 56(2)(x). This new clause brought under the tax net all gifts of money or property received by any person without consideration or for inadequate consideration exceeding a threshold of ₹50,000. This amendment applied with effect from 1st April 2017. From this date, donee-based gift tax became universally applicable to all categories of assessees, including individuals, HUFs, firms, companies, AOPs, BOIs, and other artificial juridical persons.

The explanatory memorandum to the Finance Bill, 2017, outlined the objective of the amendment. It emphasized that to prevent tax evasion through gratuitous transfers of property or money, the anti-abuse provisions should apply to all taxpayers equally. With this move, the scope of income under the head ‘Income from other sources’ was broadened significantly.

Key Features Introduced by the 2017 Amendment

The Finance Act, 201,7, not only expanded the scope of donee-based gift taxation but also brought several features into play. First, it provided that any receipt of money or property without consideration or for inadequate consideration beyond the prescribed limit would be taxable in the hands of any recipient. Second, it defined the types of property that would be included—both movable and immovable—and laid down valuation rules based on stamp duty and fair market value. Third, it specified exceptions and exclusions, such as gifts from relatives or on specified occasions, which continued to remain exempt. Fourth, to ensure uniform tax treatment, the law also amended section 49 to ensure that where property is taxed as income under section 56(2)(x), such value shall be taken as the cost of acquisition for capital gains computation in the future.

The definition of income under section 2(24) was amended by inserting clause (xviia) to include income under section 56(2)(x), thereby affirming its status as taxable income.

Relief Provisions Introduced by Finance Act, 2022 in Light of COVID-19

Recognizing the unprecedented financial stress caused by the COVID-19 pandemic, the Finance Act, 2022, introduced certain exemptions under section 56(2)(x) to provide relief for families of deceased individuals. These provisions, effective from assessment year 2023–24 but with retrospective application from 1st April 2020, inserted clauses (xii) and (xiii) in the proviso to section 56(2)(x). Clause (xii) exempts from taxation any sum received by an individual from any person towards expenditure incurred for medical treatment of self or family in respect of COVID-19-related illness. Clause (xiii) exempts any sum received by the family of a deceased individual from the employer or other persons, up to ₹10 lakh, where death was due to COVID-19 and the payment was made within twelve months of the death.

Scope of Property Covered Under Section 56(2)(x)

Section 56(2)(x) applies to specified movable and immovable properties. The scope is broad and includes the following:

Immovable Property:

  • Land (agricultural or non-agricultural)

  • Buildings or

  • Land and Building both

The stamp duty value is taken as the basis for determining whether the property is received without consideration or for inadequate consideration.

Movable Property:

As per the Explanation to Section 56(2)(x), the following movable properties are covered:

  • Shares and securities

  • Jewellery

  • Archaeological collections

  • Drawings

  • Paintings

  • Sculptures

  • Any work of art

  • Bullion

These are considered only if received without consideration or for inadequate consideration. In the case of movable property, the fair market value (FMV) is the benchmark for taxation.

Manner of Computation of Taxable Amount

The taxation depends on the nature of the property, the mode of receipt, and the thresholds prescribed.

Immovable Property:

  • Received Without Consideration
    If the stamp duty value of the immovable property exceeds Rs. 50,000, the entire stamp duty value becomes taxable.

  • Received for Inadequate Consideration
    If the difference between the stamp duty value and the actual consideration paid exceeds the higher of Rs. 50,000 or 10% of the consideration paid, the difference is taxable.

Movable Property:

  • Received Without Consideration
    If the aggregate fair market value of such movable properties exceeds Rs. 50,000, the entire FMV becomes taxable.

  • Received for Inadequate Consideration
    If the difference between the FMV and the consideration exceeds Rs. 50,000, then such difference is taxable.

Note: If multiple properties are received in one or more transactions, their aggregate value must be considered for threshold computation.

Fair Market Value and Stamp Duty Value

  • Fair Market Value (FMV):
    • In the case of shares, it is determined as per Rule 11UA of the Income Tax Rules.

    • For jewellery, artwork, and other movable properties, a valuation report from a registered valuer is typically required.
  • Stamp Duty Value:

    • It is the value adopted or assessed by the stamp valuation authority for stamp duty.

    • If the date of agreement and the date of registration differ, the stamp duty value on the date of agreement can be considered (if consideration is paid via bank or other prescribed modes on or before the date of agreement).

Exception – Transaction Between Relatives

Section 56(2)(x) does not apply if gifts are received from a relative, as defined in the Explanation to the section.

Who Qualifies as a “Relative”?

For an individual, the following are considered relatives:

  • Spouse

  • Brother or sister

  • Brother or sister of the spouse

  • Brother or sister of either parent

  • Any lineal ascendant or descendant

  • Any lineal ascendant or descendant of the spouse

  • Spouse of the persons listed above

For a Hindu Undivided Family (HUF):

  • Any member of the HUF is considered a relative.

Any gifts received from these specified persons are exempt from tax, irrespective of the value.

Exemptions Under Section 56(2)(x)

Besides gifts from relatives, the following receipts are exempt even if they fall within the scope of the section:

  • On the Occasion of Marriage:
    Gifts received by an individual on the occasion of their marriage are fully exempt.

  • Under a Will or by Inheritance:
    Gifts received under a will or by way of inheritance are not taxable.

  • In Contemplation of Death of the Payer:
    Gifts received in contemplation of death are exempt.

  • From Local Authority:
    Any gift received from a local authority, as defined under section 10(20), is not taxable.

  • From a Charitable Institution or Trust:
    Gifts received from trusts or institutions registered under Section 12A, 12AA, or 12AB, or notified under Section 10(23C), are not taxed.

  • Transactions Not Regarded as Transfer (Section 47):
    Certain transactions (such as amalgamations, mergers, demergers, etc.) not regarded as transfers aree also exempt.

Gifts Received Without Consideration – Applicability of Section 56(2)(x)

Section 56(2)(x) applies when any person receives a sum of money or property without consideration and the aggregate fair market value (FMV) exceeds the prescribed limit. The provisions are designed to tax the recipient (donee) of such gifts. If the aggregate value of gifts exceeds Rs. 50,000, the entire value becomes taxable under the head “Income from Other Sources.” The definition of ‘property’ fof section 56(2)(x) includes immovable property, shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures, any work of art, and bullion.

Gifts of Movable Property Without Consideration

When a movable property is received without any consideration and the FMV of such property exceeds Rs. 50,000, the entire FMV of the property is taxed in the hands of the recipient. For instance, if a person receives jewellery worth Rs. 1,00,000 as a gift without paying anything, the entire Rs. 1,00,000 is taxable under section 56(2)(x), assuming no exemption is applicable.

Gifts of Immovable Property Without Consideration

If an immovable property (such as land or building) is received without consideration, and the stamp duty value of such property exceeds Rs. 50,000, the entire stamp duty value becomes taxable. For example, if a person receives a house as a gift and the stamp duty value is Rs. 10,00,000, then Rs. 10,00,000 is treated as income in the hands of the recipient under section 56(2)(x), provided the gift is not from a relative or exempted under any other clause.

Gifts Received for Inadequate Consideration

Section 56(2)(x) also applies to transactions where property is transferred for a consideration that is less than its FMV. The difference between the FMV (or stamp duty value in case of immovable property) and the actual consideration paid is taxable if it exceeds Rs. 50,000. For movable property, if the FMV is Rs. 1,00,000 and the recipient pays Rs. 40,000, the difference of Rs. 60,000 is taxable. For immovable property, if a flat is bought for Rs. 8,00,000 and its stamp duty value is Rs. 12,00,000, then the difference of Rs. 4,00,000 is taxable, ovided it excprovideprovided prescribed threshold (currently 10% of consideration or Rs. 50,000, whichever is higher).

Thresholds and Tolerances for Immovable Property Transactions

A tolerance margin is allowed for immovable property to account for valuation variations. As per the proviso to section 56(2)(x), if the stamp duty value does not exceed 110% of the consideration, the difference is ignored. For instance, if a property is purchased for Rs. 10,00,000 and the stamp duty value is Rs. 10,80,000, there will be no tax implications under section 56(2)(x) as the difference is within the 10% tolerance band.

Exemptions and Safe Harbour for Transfer of Immovable Property

To reduce hardship in genuine transactions, the law provides safe harbour limits. Transactions not exceeding the tolerance threshold are excluded from taxation. Further, certain property transfers are not considered gifts at all, such as those arising from partitions of Hindu Undivided Families, under a will or inheritance, or in contemplation of death.

Gifts Received in Kind – Valuation and Taxability

Gifts received in kind, such as artwork, shares, or precious stones, are valued based on the FMV on the date of receipt. Tax is levied on this FMV if it exceeds Rs. 50,000 in aggregate. The valuation rules are specified under the Income Tax Rules and depend on the nature of the asset. For example, shares listed on a stock exchange are valued based on trading prices, while unlisted shares are valued as per prescribed formulae.

Reporting Requirements for Taxpayers

Donees receiving taxable gifts must report the income under “Income from Other Sources” in their Income Tax Return (ITR). Documentation such as gift deeds, valuation certificates, and proof of relationship (if claiming exemption for gifts from relatives) must be maintained for scrutiny. Failure to disclose such income may attract penalties and interest for concealment.

Gifts Received on the Occasion of Marriage – A Unique Exemption

Gifts received by an individual on the occasion of their marriage are fully exempt under Section 56(2)(x). This is a significant exception because it recognizes the cultural and social norms around gifting during weddings. However, it is important to note that the exemption is available only to the individual who is getting married, and not to any other person (such as parents, siblings, or friends) who may also receive gifts on the occasion.

Further, courts have clarified that this exemption does not extend to gifts received on engagements or anniversaries. The term “on the occasion of marriage” is interpreted strictly, covering only the actual marriage event.

Gifts Received from Relatives – Broader Definition and Implications

The term “relative” is defined comprehensively under the Income Tax Act for this section. For individuals, “relative” includes:

  • Spouse

  • Brother or sister

  • Brother or sister of the spouse

  • Brother or sister of either of the parents

  • Any lineal ascendant or descendant

  • Any lineal ascendant or descendant of the spouse

  • Spouse of the persons referred to above

This broad coverage ensures that gifts exchanged within close family members are not subject to tax under Section 56(2)(x). Importantly, the exemption applies regardless of the gift’s value.

For Hindu Undivided Families (HUFs), any gift received from a member of the HUF is exempt. However, if an individual receives a gift from an HUF (of which they are not a member), the gift may be taxable unless it qualifies under another exemption.

Stamp Duty Value and Its Relevance in Immovable Property Transactions

When immovable property is received without consideration or for inadequate consideration, the stamp duty value becomes critical in determining the taxability of the transaction.

  • If a person receives immovable property without consideration and the stamp duty value exceeds ₹50,000, the entire stamp duty value is taxable as income in the hands of the donee.

  • If the property is received for a consideration that is less than the stamp duty value by more than ₹50,000 and 10% (or other threshold specified) of the consideration, the differential is treated as income.

This ensures that undervalued property transactions are brought within the tax net, preventing tax evasion through disguised gifts.

Capital Gains and Cost of Acquisition in Future Transfer of Gifts

When a gifted asset is later sold by the donee, the cost of acquisition for computing capital gains is deemed to be the cost at which the donor acquired the asset. The holding period of the donor is also included for determining whether the capital gain is long-term or short-term.

This concept, established under Section 49(1), ensures continuity in tax treatment and prevents misuse of the gifting route for short-term tax benefits.

For example, if a person receives property as a gift and sells it later, the cost incurred by the original owner (donor) is considered, and the total holding period from the donor’s acquisition to the date of sale by the donee is taken into account.

Special Considerations for Gifts in Kind – Valuation Challenges

Gifts in the form of movable property (like jewellery, shares, paintings, etc.) received without consideration or for inadequate consideration are also covered under Section 56(2)(x).

Valuation for these assets is done as follows:

  • Jewellery, archaeological collections, drawings, paintings, sculptures, and any work of art are valued based on fair market value (FMV) as per prescribed rules.

  • Shares and securities are valued using a formula-based approach depending on whether they are quoted or unquoted.

The challenge often lies in determining FMV, especially for non-financial assets like art and collectibles. The income tax rules provide valuation methods, and in certain cases, certified valuations from registered valuers may be required.

Interaction with Other Provisions of the Income Tax Act

Section 56(2)(x) interacts with various other sections of the Income Tax Act, including:

  • Section 50C: Applies to the sale of land/building where the stamp duty value exceeds the sale consideration.

  • Section 49(1): For determining the cost of acquisition in case of gifts.

  • Section 147/148: Reassessment provisions that may be invoked in case of unreported taxable gifts.

  • Section 69/69A/69B: Deals with unexplained income, investments, or expenditures, which may sometimes overlap with gifts.

Proper classification and disclosure are important to avoid litigation, penalties, or reassessment.

Penalties and Consequences of Misreporting

Failure to disclose taxable gifts or incorrect classification can result in severe consequences under the Income Tax Act:

  • Penalty under Section 270A: For underreporting or misreporting of income.

  • Interest under Section 234B/234C: For default in advance tax payment.

  • Reassessment: If the Assessing Officer believes that taxable gifts were not disclosed, proceedings under Section 147 can be initiated.

Hence, due diligence in gift documentation, recipient eligibility, and valuation is critical to staying compliant.

Reporting Requirements and Documentation

There is no specific requirement to file a separate form for receiving gifts under Section 56(2)(x), but the following should be ensured:

  • Proper documentation, such as gift deeds or declarations.

  • PAN of the donor (especially for high-value gifts).

  • Valuation reports for gifts in kind.

  • Proof of relationship, if claiming exemption for gifts from relatives.

Further, while filing the income tax return, any taxable gift must be included under the head “Income from Other Sources” and tax paid accordingly.

Conclusion

The taxation of gifts under Section 56(2)(x) represents a significant development in India’s income tax regime, shifting the onus to the recipient (donee). By plugging loopholes and preventing tax-free transfers of wealth, the provision ensures that only legitimate, exempt gifts are excluded from tax. Taxpayers must exercise caution in receiving, valuing, and reporting gifts, especially when they are of high value or involve complex relationships. A proper understanding of exemptions, documentation, and compliance requirements will go a long way in ensuring that gift-related tax exposures are minimized.