As Christmas is coming around, it is important to remember the tax implications of gifts from and to Indian Americans.
Before 1998, gifts given taxed the giver in the form of a Gift Tax. This gift tax though was abolished in 1998 but in 2004, a new form of the tax was created under the Income Tax Act. In its current form, tax would be imposed in certain situations for the gift collectible from the recipient.
This provision pegged the base amount of Rs 50,000 as a taxable gift received by an individual, regardless of location. The recipient of this amount or gift value would be taxed by adding the value of the gift with the recipient’s total income. Income tax would then be imposed on that. The kinds of gifts covered under this provision cash, property, jewelry and the like.
The gift must necessarily be located in India and for valuation purposes, the following guidelines are applied:
- When the property is an immovable, then the valuation of the property would be based on the stamp duty value of the property;
- When the property is a movable or inchoate, such as shares and securities, objects of art or jewelry, the valuation would be the fair market value of the property;
There are exemptions to this income tax on gifts, which are as follows:
- A gift received from a blood relative is concept regardless of value, even above threshold Rs50,000. A relative is defined as a spouse, brother or sister, or their spouses, ascendants or siblings;
- Gifts by reason of marriage are also exempted regardless of value above threshold amount;
- Gifts by reason of testamentary provisions or wills or by inheritance are also exempt even above threshold amount;
It must be duly noted that NRIs in the US or Indian-Americans, there is a Double Taxation Avoidance Agreement between the two countries. In this executive agreement, US allows India the first right to tax gifts when applicable.
Now, for NRIs in the United States, tax on gifts is imposed upon the donor or the giver of the gift and not the recipient. This provision applies only when the giver is a US taxpayer and/or a US resident, legal permanent or citizen. If the gift was given by a resident of India to that of an NRI in the US, no tax is imposable as the giver is not a resident or taxpayer of the US. Instead, the recipient of the gift is required to fill out IRS form 3520 or the ‘Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts’.
According to Rajesh Vaidya fo the Raju Maniar CPA firm based in Florida, “Even if there is no tax liability at the time of receiving the gift, US residents, citizens and Green Card holders who receive gifts over US$100,000 from someone in India must file Form 3520 along with their tax return. This applies to financial assets such as cash, investments and also physical assets like property.”