Gift given by relative which include step sister and step brother

Key Considerations & Advice:

1. Definition of "Relative" is Crucial:

• The most important factor is whether a step-brother or step-sister falls under the definition of "relative" as defined in the Income Tax Act.

• Specifically refer to Section 56(2)(x) of the Income Tax Act, 1961. This section deals with gifts received without consideration.

• As per this section, "Relative" includes:

  • Spouse of the individual

  • Brother or sister

  • Brother or sister of the spouse of the individual

  • Brother or sister of either of the parents of the individual

  • Any lineal ascendant or descendant of the individual

  • Any lineal ascendant or descendant of the spouse of the individual

  • Spouse of the persons referred to above

• Step-brother and step-sister are generally not covered in the above list of relatives. This is the most important point to emphasize to your client.

2. Taxability of the Gift:

• If the step-brother/step-sister is NOT considered a "relative" under Section 56(2)(x):

  • The gift will be taxable in the hands of the recipient (your client) if the aggregate value of gifts received from all non-relatives during the financial year exceeds ₹ 50,000.

  • The entire amount of the gift will be taxable as "Income from Other Sources" under Section 56(2)(x).

• If the step-brother/step-sister IS considered a "relative" (highly unlikely but worth double-checking the specific family circumstances):

  • The gift will be exempt from income tax, regardless of the amount.

3. Types of Gifts and Their Valuation:

• Money: The face value of the cash or the amount credited to the bank account is the value considered.

• Immovable Property (Land, Building):

  • If received without consideration (as a gift), the stamp duty value on the date of the gift is considered. If the stamp duty value exceeds ₹ 50,000, it's taxable (if not from a relative).

• Movable Property (Shares, Securities, Jewelry, Paintings, Archaeological Collections, Sculptures, Drawings, etc.):

  • If received without consideration, the fair market value on the date of the gift is considered.

  • For listed shares and securities, the market price would be used. For other assets, a valuation report from a registered valuer might be necessary to determine the fair market value.

4. Reporting the Gift:

• If the gift is taxable, your client must report it as "Income from Other Sources" in their Income Tax Return (ITR).

• The applicable ITR form will depend on the client's overall income and sources of income.

• Keep records of the gift, including the donor's name, address, PAN (if available), the date of the gift, the nature of the gift, and its value.

5. Important Considerations and Due Diligence:

• Nature of the Relationship: Even though legally a step-brother/sister isn't directly covered, assess the closeness and history of the relationship. While it likely won't change the legal definition, understanding the context is important.

• Documentation: Advise your client to gather as much documentation as possible related to the gift. This includes:

  • Gift deed (if any)

  • Bank statements showing the transfer of funds

  • Valuation reports (if applicable for immovable or movable property)

  • Any other relevant correspondence.

• Gifting to Spouse/Other Relatives Strategically (Caution Advised): Be cautious about suggesting strategies to avoid tax. For example, gifting to a spouse and then the spouse gifting to the client. This can be seen as tax avoidance and can attract scrutiny from the Income Tax Department. Never advise a client to engage in tax evasion.

• Specific Family Circumstances: Probe for any unique circumstances that might affect the relationship or the interpretation of the law. This is crucial.

• Consult a Tax Professional: If the gift is substantial or complex (e.g., involves significant immovable property or intricate financial instruments), strongly advise the client to seek a formal, written opinion from a qualified tax lawyer or chartered accountant.

Example Scenario and Advice Script:

"Mr./Ms. Client, based on the information you've provided, a gift received from your step-brother/step-sister is likely to be taxable in your hands. The Income Tax Act generally does not consider a step-brother/step-sister as a 'relative' for the purpose of gift tax exemptions.

Therefore, if the total value of all gifts you receive from non-relatives during this financial year exceeds ₹ 50,000, the entire amount of the gift from your step-brother/step-sister will be added to your income and taxed according to your applicable income tax slab.

To be absolutely sure, and before you file your return, I strongly recommend that we review all the details, and if the amount is significant, obtain a formal opinion from a tax lawyer. We need to properly document the gift and report it accurately in your income tax return to avoid any potential issues with the Income Tax Department. Do you have any documentation regarding the gift that you can share with me?"