Not all gifts are tax free
Section 56(2)(x) of the Income Tax Act, 1961, governs the taxability of gifts. If you’re gifting a financial asset such as mutual fund units or listed shares, here’s the basic rule: if the value of gifts received by an individual or Hindu Undivided Family (HUF) exceeds ₹50,000 in a financial year, the entire amount is taxed under “Income from Other Sources” in the hands of the recipient.
However, gifts from “relatives” are fully exempt, regardless of amount. A “relative”, in the case of an individual, includes their spouse, siblings, spouse’s siblings, parents’ siblings, direct ancestors and descendants of both the individual and their spouse, as well as the spouses of all these relatives.
Gifts exchanged between friends, cousins, or unrelated individuals are not exempt, even if given with the best of intentions.
Tax implications for the giver
When you gift a financial instrument, it may qualify as a transfer, but it is not a taxable transfer for capital gains purposes, since gifts are explicitly excluded under Section 47(iii) of the Income Tax Act. This means the giver does not pay capital gains tax at the time of gifting.
However, there could still be indirect tax consequences if the donor gifts the asset to someone whose income will later be clubbed with theirs.
Clubbing of income: A hidden trap
The clubbing provisions (Sections 60-64) of the Income Tax Act are designed to prevent tax avoidance through gifts. The common scenario involves gifting to a spouse, minor child, or daughter-in-law.
Here’s how it works: if you gift mutual fund units to your spouse, and they earn capital gains on redemption, those gains will be taxed in your hands, not your spouse’s. Similarly, income such as dividends or capital gains from assets gifted to a minor child is included in the income of the parent with the higher pre-clubbing income.
An exemption of ₹1,500 per child per year is allowed. Once the child turns 18, however, this income is taxed separately in the child’s hands.
So while gifting to a child can serve as a long-term tax optimization tool, especially if they fall in a lower tax bracket, it offers no immediate tax break.
Cost of acquisition and holding period
If you’re the recipient of a gifted asset and later sell it, you may wonder how to calculate capital gains. The tax law provides that you inherit both the cost of acquisition and the holding period of the previous owner.
For example, if your parent’s sibling bought shares in 2015 for ₹5 lakh and gifted them to you in 2025, and you sell them in 2026, your cost of acquisition would be ₹5 lakh, and your holding period would start from 2015. This qualifies as a long-term capital gain (LTCG), which is taxed at 12.50% beyond the ₹1.25 lakh annual exemption (for listed shares and equity funds).
This provision is particularly advantageous when gifting long-held equity or mutual fund units, as it allows the recipient to benefit from lower tax rates.
Gifting to and receiving from non-residents
With families increasingly spread across borders, understanding how gifts to or from non-residents are treated becomes crucial.
A gift of a financial instrument made by a resident Indian to a non-resident may or may not be taxable in India, depending on the relevant tax treaty. However, the recipient must check for tax implications in their country of residence.
Conversely, if a resident receives a gift from a non-resident, the same ₹50,000 threshold under Section 56(2)(x) applies. If the donor qualifies as a “relative,” the gift is fully exempt. But if the gift is from a non-relative and the aggregate value exceeds ₹50,000 in a financial year, the entire amount is taxable in the recipient’s hands in India.
Importantly, gifts received in foreign currency are converted into Indian rupees at prescribed exchange rates for tax valuation.
Documentation is crucial in such cases, especially to establish the relationship between the parties and the purpose of the gift when received from abroad. In the absence of adequate documentation, where the recipient cannot substantiate the gift’s purpose, the amount may be taxed at substantially higher rates in India.
Final thoughts
Gifting financial instruments during the festive season can be a meaningful way to help loved ones build long-term wealth. But it’s vital to understand the tax laws to avoid unpleasant surprises later. Always document your gifts properly—using a gift deed if needed—and inform the recipient about potential tax consequences.
As festive generosity meets financial prudence, let your gifts shine not just with intent, but with foresight.
Ashish Karundia is a practising Chartered Accountant and author.
