Not all gifts are created equal, nor are they perceived as such. While receiving a gift might seem like a straightforward and joyful experience, the Income Tax Act of India has a few strings attached, especially when it comes to taxation. One such provision that often raises questions among individuals and professionals is Section 56(2)(vii) of Income Tax Act.
But here’s the good news: not every gift you receive will be taxed. This section also lays down clear exceptions to avoid undue tax liability on certain types of gifts. Let’s explore this topic in detail, especially focusing on what you don’t have to worry about when receiving assets as gifts.
A Quick Recap: What is Section 56(2)(vii) of Income Tax Act?
Before jumping into the exceptions, let’s understand the section itself.
Section 56(2)(vii) of the Income Tax Act was introduced to curb tax avoidance through gifts. According to this section, if an individual or Hindu Undivided Family (HUF) receives certain movable or immovable property for free or for inadequate consideration, the difference between the fair market value (FMV) and the actual consideration may be taxed as ‘Income from Other Sources’.
This is applicable when:
- The aggregate value of gifts exceeds ₹50,000 in a financial year.
- Gifts are received without consideration or for consideration below FMV.
But thankfully, there are several exceptions to this rule.
Key Exceptions to Section 56(2)(vii): When Gifts Are Not Taxed
Here’s a closer look at when you can receive a gift without attracting any income tax liability under this section.
1. Gifts from Relatives
Perhaps the most generous exception, gifts received from relatives are fully exempt, regardless of value.
Under this section, “relatives” include:
- Spouse of the individual
- Brother or sister (of the individual or their spouse)
- Brother or sister of either of the parents
- Lineal ascendant or descendant (e.g., parents, children, grandparents)
- Spouse of any of the above
This ensures that gifts exchanged within the close family circle are not penalised under tax law.
2. Gifts Received on the Occasion of Marriage
Any gifts received by an individual on their marriage are fully exempt from tax. This applies regardless of whether the gift comes from a relative or a friend. However, this exemption does not apply to other ceremonies like anniversaries or birthdays.
3. Gifts Under a Will or by Inheritance
Assets received through a will or inheritance with online GST software that are also outside the purview of taxation under this section. So, whether it’s land, jewellery, or shares inherited from a parent or grandparent, you won’t have to pay income tax on it.
4. Gifts Received in Contemplation of Death
This is a rarely used but interesting clause. If someone gives away assets while knowing they are close to death (known as donatio mortis causa), such gifts are not taxed under Section 56(2)(vii).
5. Gifts from Local Authorities or Registered Trusts
Gifts received from:
- Local authorities
- Charitable institutions registered under Section 12AA or 12AB
- Educational or medical institutions approved by the government
…are not taxable, provided the entity is compliant with government regulations.
6. Gifts Received on Certain Occasions or by Way of Transactions Not Regarded as Transfer
In some cases, even gifts outside the family may not be taxed if they fall under specific provisions such as:
- Distribution of assets in HUF partition
- Gifts received during amalgamations or demergers are covered under Section 47 of the Act
Why Businesses Need to Stay Updated?
While Section 56(2)(vii) primarily affects individuals and HUFs, businesses must also stay on top of these regulations, especially when dealing with gifted inventory, transferred assets, or intra-group transactions.
To maintain compliance and accuracy, modern tools, including inventory management software and online GST software, can help track and document gifted or transferred assets. Not only does this reduce errors, but it also ensures you’re always ready in case of an audit or tax scrutiny.
One such solution tailored for Indian businesses is MargBooks. Whether you’re a startup or a growing enterprise, MargBooks helps manage:
- GST billing and return filing
- Inventory control and valuation
- Financial reporting and analytics
So, if you’re dealing with frequent transactions, be it gifts, barter, or intra-group asset shifts, having MargBooks on your side can save you from unnecessary tax trouble.
Final Thoughts
Section 56(2)(vii) of Income Tax Act may appear stringent at first glance, but with the correct knowledge of its exceptions, you can safely receive gifts without fearing a tax bill.
Here’s a quick recap of when gifts are NOT taxable:
- If received from relatives
- On the occasion of marriage
- Through inheritance or will
- From local authorities or registered trusts
- In contemplation of death
- Under specific non-taxable transfers as per other sections
While individual taxpayers should remain vigilant, businesses, too, must monitor asset movements with robust digital solutions. Tools, inventory management software, and online GST software, such as MargBooks, ensure that you’re not only tax-compliant but also digitally empowered.
