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CBDT tags gifts for taxation
April, 14th 2010

Its time you looked that gift horse in the mouth, or so the new valuation rules decree. Whether its that watch your girlfriend presented you for Christmas or the shares Daddy just handed to you, get ready to pay tax on them. The Central Board of Direct Taxes has notified the valuation rules for gifts over Rs 50,000, and these will come into effect retrospectively from October 1, 2009.

The transaction value of warrants, preference shares and other such instruments transferred to another individual or a company will now have to be certified by a category-I merchant banker according to CBDTs new fair market value (FMV) norms for gifts.

Valuation rules have now been prescribed for gifts or properties, other than immovable properties, said Vikas Vasal, partner, KPMG. Accordingly, all gifts of jewellery, art etc post October 1, 2009 would have to valued and taxed in line with the new rules. Tax will have to be paid now, if not deposited in advance on an ad hoc/estimated basis.

Gifts from a relative for a marriage, under will or by way of inheritance, from any local authority, or from any fund or trust is exempted from tax. Spouses, siblings, and any lineal ascendant or descendant are defined as relatives under the Income-Tax Act.

The government had amended Section 56 of the Income Tax Act in 2009 to bring to tax the difference between the FMV of a property and the actual money paid by the recipient of such property, in cases where it was acquired free or for a low amount. The rules for computing FMV other than property were pending.

According to the latest notification, the FMV of jewellery, archeological collections, drawings, paintings, sculptures or works of art shall be the price which they would would fetch if sold in the open market on the valuation date. For jewellery or artistic works bought on the valuation date from a registered dealer, its invoice shall be the FMV.

If jewellery or art is received by any other mode and its the value exceeds Rs 50,000, the taxpayer will have to get the report of a registered valuer regarding the price it would fetch if sold in the open market on the valuation date.

For shares and securities of listed companies, the FMV will be that recorded on any reconised stock exchange. If these quoted shares and securities are transacted other than through recognised stock exchanges, their FMV shall be their lowest price quoted on the exchange on the valuation date. In the case of unlisted shares, book value will be the benchmark.

Tax experts say the guidelines are quite fair. The guidelines are quite reasonable for taxpayers. There was apprehension that the guidelines for shares would be very agressive but they are actually quite conservative, said Anurag Jain, BMR Advisors.

The FMV for unquoted shares (warrants, preference shares) and securities other than equity shares in a company that are not listed in any recognised stock exchange shall be the price it would fetch if sold in the open market on the valuation date for which a taxpayer will have to obtain a report from a merchant banker or an accountant.

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