[Opinion] Taxation of Gifts from Family

CA (Dr.) Suresh Surana – [2025] 181 taxmann.com 716 (Article)

1. Introduction

For the purpose of determining whether a gift is exempt from tax, the Income-tax Act, 1961 (hereinafter referred to as ‘the IT Act’) does not use the term “family”; instead, the relevant exemption under Section 56(2)(x) provides for determining on whether the donor qualifies as a “relative.”

Gifts received from a “relative” are fully exempt from tax, irrespective of the amount or mode of receipt. Explanation to Section 56(2)(x) provides an exhaustive and restrictive definition of “relative” for individuals, which includes:

(i) the spouse of the individual;

(ii) the brother or sister of the individual;

(iii) the brother or sister of the spouse of the individual;

(iv) the brother or sister of either of the parents of the individual;

(v) any lineal ascendant or descendant of the individual;

(vi) any lineal ascendant or descendant of the spouse of the individual; and

(vii) Spouse of the aforementioned persons.

Accordingly, only gifts received from such specified relatives would qualify as tax-exempt. Exemption from tax on gifts is strictly governed by the definition of “relative” under Explanation to Section 56(2)(x).

In-laws – Only those who fall within the specified relative definition such as the lineal ascendants or descendants of the spouse (e.g., father-in-law, mother-in-law etc.) or the brother/sister of the spouse (e.g., brother-in-law, sister-in-law) are treated as “relatives.”

Cousins – Cousins are not included in the statutory definition of “relative.” Therefore, gifts received from cousins are taxable unless covered by another exemption (e.g., marriage occasion).

Siblings’ Spouses – The spouse of a sibling (e.g., sister-in-law or brother-in-law) does qualify because the definition includes “the spouse of any of the persons referred to above.” Since a brother or sister is a relative, their spouse is also treated as a relative and gifts from them are exempt.

2. Tax Treatment of Gifts from a Spouse or Spouse’s Family

Section 56(2)(x) provides for a favourable tax treatment to gifts received through marital relationships by recognising the spouse and certain members of the spouse’s family as “relatives” for the purpose of exemption under Section 56(2)(x). Gifts received from a spouse are fully exempt without any monetary limit. Further, Section 56(2)(x) extends this exemption to gifts received from the brother or sister of the spouse, and any lineal ascendant or descendant of the spouse, as well as the spouses of such persons. Accordingly, gifts from the spouse’s parents, grandparents, etc. qualify as tax-exempt.

While such gifts are not taxable in the hands of the recipient, clubbing provisions under Sections 60 to 64 may apply in certain situations for instance Section 64(1)(iv), which mandates that income arising from assets transferred to a spouse without adequate consideration is taxable in the hands of the transferor. Thus, although the gift transaction itself is exempt, the future income generated from the gifted amount or asset may be clubbed back with the income of the spouse who made the gift.

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