{"id":3365,"date":"2025-08-21T19:24:14","date_gmt":"2025-08-21T19:24:14","guid":{"rendered":"https:\/\/www.luzenta.com\/blog\/?p=3365"},"modified":"2025-08-21T19:24:14","modified_gmt":"2025-08-21T19:24:14","slug":"understanding-gift-taxation-under-section-562x-a-donee-centric-approach","status":"publish","type":"post","link":"https:\/\/www.luzenta.com\/blog\/understanding-gift-taxation-under-section-562x-a-donee-centric-approach\/","title":{"rendered":"Understanding Gift Taxation Under Section 56(2)(x): A Donee-Centric Approach"},"content":{"rendered":"

The Gift-tax Act, 1958, originally governed the taxation of gifts in India. Under this legislation, the tax liability rested with the donor \u2014 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 The Government of India repealed the Gift-tax Act in 1997, eliminating donor-based gift taxation.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.<\/span><\/p>\n

Introduction of Donee-Based Gift Taxation by the Finance (No. 2) Act, 2004<\/b><\/p>\n

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 \u20b925,000 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 \u20b925,000 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.<\/span><\/p>\n

Amendment by the Taxation Laws (Amendment) Act, 2006<\/b><\/p>\n

The initial threshold of \u20b925,000 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 \u20b925,000 with a consolidated limit of \u20b950,000 for the entire financial year. This change meant that all cash gifts received during a year would be aggregated. If the total amount exceeded \u20b950,000, the entire sum\u2014not just the excess\u2014would 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.<\/span><\/p>\n

Expansion to Gifts in Kind by the Finance (No. 2) Act, 2009<\/b><\/p>\n

Until 2009, only monetary gifts were covered under the donee-based taxation scheme. However, there remained a major gap in the law\u2014gifts 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.<\/span><\/p>\n

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.<\/span><\/p>\n

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).<\/span><\/p>\n

Extension to Firms and Closely Held Companies by Finance Act, 2010<\/b><\/p>\n

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.<\/span><\/p>\n

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.<\/span><\/p>\n

Universal Application of Donee-Based Taxation by Finance Act, 2017<\/b><\/p>\n

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.<\/span><\/p>\n

To implement a universal gifting tax regime, the Finance Act, 2017 substituted earlier clauses with a new provision\u2014section 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 \u20b950,000. 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.<\/span><\/p>\n

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.<\/span><\/p>\n

Key Features Introduced by the 2017 Amendment<\/b><\/p>\n

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\u2014both movable and immovable\u2014and 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.<\/span><\/p>\n

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.<\/span><\/p>\n

Relief Provisions Introduced by Finance Act, 2022 in Light of COVID-19<\/b><\/p>\n

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\u201324 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 \u20b910 lakh, where death was due to COVID-19 and the payment was made within twelve months of the death.<\/span><\/p>\n

Scope of Property Covered Under Section 56(2)(x)<\/b><\/p>\n

Section 56(2)(x) applies to specified movable and immovable properties. The scope is broad and includes the following:<\/span><\/p>\n

Immovable Property:<\/b><\/p>\n