Individuals who have escaped paying income-tax over the last two-and-a-half years by splitting gifts received in cash from friends will no longer enjoy this benefit. They will have to pay tax if the aggregate amount received from such unrelated parties exceeds Rs 50,000. The liability will accrue from assessment year 2007-08 or FY 06-07 following changes in the income-tax legislation last week.
From September 1, 2004, individuals receiving gifts in cash of over Rs 25,000 known as money received without consideration in technical parlance from an unrelated party had to include this amount in their total income and pay tax at the applicable rates. They could, however, escape tax if they received amounts less than Rs 25,000 from different people. For instance, an individual could receive Rs 20,000 each from three friends and yet not pay tax. There was no obligation to pay tax because the amount received from each person was less than the threshold of Rs 25,000.
The government plugged this loophole in the Taxation Law Amendment Bill which has now become statute. The exemption limit has now been raised to Rs 50,000 in the aggregate from all sources. This would mean that even if small amounts of cash are received as gifts, the aggregate sum should not exceed Rs 50,000. If it does, the amount will have to be included as income from other sources and tax has to be paid at the normal applicable rates. The amendment kicks in from assessment year 2007-08 (or financial year 2006-07) and subsequent years.
This provision will, however, not apply to gifts in kind. Receipt of gifts in the form of, say, jewellery, shares, or other such item in kind from unrelated parties would not attract tax under this provision, according to Daksha Baxi, Senior Associate International Taxes, Nishith Desai & Associates.
The good news for tax payers is that the income-tax law has been amended retoospectively to exclude several receipts that are not in the nature of income from the tax net. The exclusion list covers amounts received from a charitable trust or a hospital. So individuals who received over Rs 25,000 from a charitable trust or a hospital in the past (between September 1 2004 to April 1, 2006) do not have to pay tax on these receipts. The amendment will apply for AY 2005-06 and subsequent years.
A refund can be claimed if tax has already been paid for assessment year (AY) 2005-06. Those filing income-tax returns for AY 2006-07 need not have to include such receipts as income from other sources.
Going by the amendments, payments received from a local authority or from any fund or foundation or university or other educational institution or hospital or any other medical institution or any trust under Section 10 (23 C) or a trust or institution registered under Section 12 AA have been excluded from the scope of income and hence will not be liable to tax.
Amounts received from a relative, money received by a person when he gets married, amounts received under a will or by way of inheritance and the amount which is received in contemplation of death of the payer are also not under the tax net.