Taxation of Gifts and Zero Rating of Gift Transactions in the Hands of Individual as per Income Tax Law

In India, receiving or giving gifts can come with tax implications that many individuals overlook. The Income Tax Act, 1961 lays out clear rules for taxation of gifts, but with specific exemptions and thresholds. A frequently misunderstood aspect is the “zero rating” of gift transactions under certain conditions, which can help recipients avoid any tax liability.

In this blog, we’ll explain the rules surrounding taxability of gifts, when gifts are tax-exempt, and what zero-rated gift transactions mean for an individual taxpayer.

🎁 What is Considered a Gift under Income Tax Law?

Under Indian tax law, a gift includes:

• Cash or monetary instruments
• Movable properties (like shares, jewelry, cars)
• Immovable properties (like land or buildings)
• Other assets received without consideration

📜 Legal Framework: Section 56(2)(x) of the Income Tax Act

Section 56(2)(x) governs the taxability of gifts received by an individual or HUF. As per this provision, any sum of money or property received without consideration or for inadequate consideration is taxed as “Income from Other Sources”, unless exempted.

🎯 When Are Gifts Taxable?

Gifts become taxable when:

If these thresholds are crossed, the entire amount/value becomes taxable, not just the excess.

🛡️ Exemptions: When Are Gifts Not Taxable?

Gifts are not taxable in the following situations, often referred to as “zero-rated gift transactions“:

✅ Gifts Received from Relatives

Gifts from defined relatives are fully exempt, regardless of amount.

Who qualifies as a relative?

• Spouse
• Parents
• Siblings (self or spouse)
• Lineal ascendants/descendants (self or spouse)
• Siblings of parents

✅ Gifts Received on Special Occasions

• On the occasion of marriage (not birthdays or anniversaries)
• Under a will or inheritance
• In contemplation of death of the payer
• From local authorities or registered charitable trusts
• From any individual in contemplation of death

These are considered “zero-rated” because they attract no tax under the Act.

🧾 Examples of Gift Taxation and Zero Rating

🧍‍♂️ Example 1 – Taxable

Ravi receives ₹80,000 in cash from a friend.

• Since the amount exceeds ₹50,000 and the friend is not a relative, the entire ₹80,000 is taxable under Section 56(2)(x).

💍 Example 2 – Zero Rated

Neha receives gold jewelry worth ₹2 lakh from her mother.

• Since it’s from a relative, it is fully exempt (zero-rated transaction).

🏡 Example 3 – Partial Consideration

Ajay buys a house from a friend for ₹15 lakh while the stamp duty value is ₹20 lakh.

• Difference = ₹5 lakh (> ₹50,000 and > 10% of ₹15 lakh)
• Hence, ₹5 lakh is taxable in Ajay’s hands as income from other sources.

📌 Reporting Gifts in ITR

Even if a gift is exempt, it’s recommended to:

• Disclose it in the ITR under “Exempt Income”
• Maintain proper documentation (gift deeds, ID proofs, relation proofs)

⚠️ Common Mistakes to Avoid

• Assuming all gifts are tax-free
• Not documenting the relationship with the donor
• Ignoring stamp duty value vs. actual consideration in property transfers
• Not reporting exempt income in ITR

📝 Final Thoughts

The Income Tax Law treats gifts with caution, taxing most unless they meet specific exemptions. The concept of zero-rating gift transactions applies when gifts are received from relatives, on marriage, or via inheritance, offering full relief from tax.

As gift tax laws are subject to frequent scrutiny and updates, especially with rising digital transactions, individuals should:

• Understand the tax rules
• Retain proper documentation
• Report gifts accurately

When in doubt, always consult a tax professional.