Receiving gifts is always pleasurable, but do you know it is taxable in some cases? Individuals are charged taxes that are divided under various heads based on the source of income. Gift tax and inheritance tax are two such taxes that may cause confusion. Individuals may consider them as one, which is clearly not the case. Knowing about all these is essential for better and efficient tax planning.
This article will help you understand the meaning and features of gift tax and inheritance tax, along with a clear comparison between them.
What Is Gift Tax?
When money or property is transferred from one person to another without receiving anything in return, it is called a gift. The taxability of such gifts is governed by Section 56(2)(x) of the Income Tax Act, 1961, even though the Gift Tax Act of 1958 was repealed in 1998. Gifts are taxed as income in the recipient’s hands if their aggregate value exceeds ā¹50,000 in a financial year and they are not received from specified relatives or under other exempt circumstances
Key Features:
- Threshold Limit: In a fiscal year, gifts exceeding ā¹50,000 are subject to “Income from Other Sources” taxes.
- Cash, immovable property (such as buildings or land), and movable property (such as shares or jewellery) are all examples of taxable gifts.
- The Tax Rate is determined by the recipient’s applicable income tax slab.
- According to the law, gifts from specified relatives as defined under the Income Tax Act are completely exempt.
- Additional Exemptions:
- Presents given as part of a marriage ceremony.
- Donations from local government agencies, registered charitable trusts, etc.
What Is Inheritance Tax?
A tax imposed on assets or wealth inherited after a person’s death is called inheritance tax, or estate duty. There isn’t an inheritance tax in India at the moment. Due to administrative inefficiencies, it was eliminated in 1985, although it had previously been applicable under the Estate Duty Act.
Tax Consequences of Inheritance in India
- No Inheritable Asset Tax: At the time of transfer, inheritance of money, shares, or property is tax-free.
- Tax on Future Income: The inheritor is responsible for paying taxes on any income received from inherited assets, such as rent, dividends, or capital gains.
- India is a better option for succession planning than many Western nations because there is no requirement to pay estate duty.
Gift Tax vs Inheritance Tax: Planning Strategies
Using wise tactics can help maintain family wealth for future generations, whether you’re transferring assets through inheritance or gifting them during your lifetime.
Here are a few successful strategies to think about:
1. Make use of Relationship-Based Exemptions
- To avoid taxes, give to family members like your spouse, parents, siblings, or children.
- According to the Income Tax Act, lineal ascendants, descendants, and their spouses are considered relatives.
2. Divide Presents Over Several Years
- To remain within the exempt limit, split large gifts into smaller portions under ā¹50,000 annually.
3. Present on Special Occasions
- Make use of special events, such as weddings, where gifts of any size are completely tax-free.
4. Create a Will
- A will guarantees legal clarity, prevents family conflicts, and makes asset transfers easier.
Comparison: Gift Tax vs Inheritance Tax
- Applicability: Certain transfers made during a person’s lifetime are subject to gift tax; inheritance tax has not been imposed in India since 1985.
- Taxable Event: Inheritance is not taxed at the time of receipt, but gifts from non-relatives exceeding ā¹50,000 in a fiscal year are subject to income tax.
- Exemptions: Inheritance itself is completely exempt from taxes, as are gifts given by designated family members, upon marriage, or through inheritance.
- Taxpayer: In India, there is no taxpayer liability for inheritances, but the recipient must pay tax in the event of a gift tax, if applicable.
- Ongoing Tax Impact: The recipient or inheritor is subject to taxes on any future income derived from inherited or gifted assets, such as capital gains or rent.
| Parameter | Gift Tax | Inheritance Tax |
| Applicability | On gifts above ā¹50,000 in value | Not applicable in India |
| Timing | During the lifetime of the donor | After the death of the property owner |
| Exemptions | From relatives, on marriage, via will, etc. | Not needed (inheritance is tax-free) |
| Taxed Person | Recipient | N/A |
| Tax Rate | As per the recipientās income tax slab | N/A |
| Law Applicable | Section 56(2)(x) of the Income Tax Act | Estate Duty Act (abolished in 1985) |
| Income on Transferred Assets | Taxable (e.g., rent, dividends, etc.) | Taxable |
Bottomline
The conclusion can be drawn that it is important to know about taxes and their implications. Inheritance is not taxed in India after 1985, as the estate duty was abolished. The recipient is not taxed when they inherit the property or other assets. On the other hand, gift tax is charged when the amount exceeds Rs. 50,000.
Exemption is allowed in case the gift is given by family members. You may now understand the implications of taxes in India and the way they can be avoided. All this information will help you with a better tax planning strategy.
Written By: Tanya Kumari