Nephew and Niece are not “Relative” of an individual under Income Tax act 1961

Nephew and Niece are not "Relative" under Income Tax act 1961

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Query

 My real brother has been given in adoption to my uncle.  As a result, we have now become cousins.

 My said brother now wants to gift some of his shares to my mother i.e. his (also) biological mother.  Will they be covered under the term “relative” within the meaning of section 56(2) (vii) of Income Tax Act for exemption from capital gains tax?

 Similarly, my sister – in- law (i.e. wife of the said brother) also wants to gift some of her shares to my mother.  Will they too be covered under the term “relative”?

Kindly enlighten the position of gift if the demat accounts are held in joint names but accounting is being done in the name of 1st holder and the first holder is giving gift.

Opinion:

It’s an interesting issue.

As per sub clause (c) of section 56(2)(x) of Income Tax Act 1961, any property other than money and immovable property received without consideration & Fair Market Value is greater than  Rs.50,000/- then FMV will be taxable as Income from other sources

If there is inadequate consideration whereby the property is purchased at a price lower than its Fair Market Value and the difference between actual sale consideration & MFV is more than Rs.50000/- then such difference [FMV less actual sale Consideration) will be taxable as Income from other sources

Property means the following capital asset of the assessee –

  • immovable property being land or building or both
  • share and securities
  • jewellery
  • archaeological collections
  • drawings
  • paintings
  • Sculptures
  • any work of art
  • Bullion

Provision of 56(2)(x) ) of Income Tax Act 1961, shall not apply to any sum of money or any property received from any “Relative”.

Relative, for the purpose of above provision under the Income Tax Act 1961 is as under:

  1. In case of an Individual
  2. Spouse of the individual;
  3. Brother or sister of the individual;
  4. Brother or sister of the spouse of the individual;
  5. Brother or sister of either of the parents of the individual;
  6. Any lineal ascendant or descendent of the individual;
  7. Any lineal ascendant or descendent of the spouse of the individual;
  8. Spouse of the persons referred to in (1) to (6).
  9. In case of HUF, any member thereof.

Coming to the specific queries raised in the present case, it may be noted that:

As per provision of Income Tax Act 1961 Gift received by an individual from “Brother or sister of either of the parents of the individual and their spouse i.e. uncle and aunty” will be considered as gift from “Relative”. Resultantly, gift from uncle and aunty will not be taxable under in the hands of the recipient as “Income from other sources”.

Interestingly, reverse is not true. Gift received by any individual from nephew or niece will not be considered as gift received from “Relative”.

Normally, the word “relative” is believed as a cohesive term whereby if X is a relative of Y then Y will also be considered as Relative of X. But, this is not so recognised by the Income Tax Act-1961.

In your specific case, if the gift would have been received by nephew or niece, it would have been tax free. But since it is received by uncle/aunty from Nephew / Niece, it will not be tax free.

For Income Tax Act, we need to forget that the “Relative” is a cohesive term. Definition of “Relative” needs to be ascertained from the angel of recipient for each and every gift.

The fact of adoption is irrelevant in the above provision of Income Tax Act-1961.

You may also refer our other articles on the issue at following link:

https://thetaxtalk.com/2014/12/15/x-may-relative-y-y-may-not-interesting-income-tax/

But as per definition of relative child of brother or sister of the individual or child of brother or sister of the spouse of the individual is not relative, therefore provisions of section 56(2)(x) of Income Tax Act 1961 will come into play.

  1. Therefore in above query as the gift by child of brother or sister of the spouse of the individual is taxable under head Income from other source as per section 56(2)(x) of Income Tax Act 1961.

 

 


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3 Comments

  1. December 20, 2021
    Neil Michael

    In relation to the query above, can a nephew gift a said amount…say 10 lakhs…to his father, who can then gift it to his brother in law (uncle)? Would this be illegal?

    Reply
  2. January 11, 2022
    indudhar

    if unmarried person made nominee to niece for bank deposits after his death niece received bank FD in his name is it taxable is there any limitation for cash

    Reply
  3. July 14, 2022
    BRIJ PARKASH SAINI

    I want to gift Rs60000/- to my niece ( my elder brothers” daughter, her parents are not alive).Will the gifted amount be tax free.
    Pl advise.
    Thanks

    Reply

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