x may be relative of y but y may not be: interesting income tax

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Query 1]

This is with reference to Tax Talk published in The Hitavada in money dated 8th December regarding taxability of gift amount. Does the term any lineal ascendant or descendant of the individual include daughters/sons of sister of individuals? Whether Nana or Nani would be relative for income tax purpose? [Rahul Yadav-rryadav1996@gmail.com]

Opinion:

Tax implication is one of the key concern taxpayers gets embedded in while they plan to give or receive gift. Presently, gifts received from a “relative” would not be taxed & that’s the reason why an individual has to ensure that the person who is giving the gift is falling within the four corners of the word “Relative” under the Income Tax Act, else the receipt could end up being taxed.

Though the query appears to be simple, it is not so. Relative has different meaning under the income tax under different section. For the purpose of section 56(2) of the Income Tax Act-1961, following are the only person who are considered as “Relative” of an individual & gift received from any of the following person is totally tax free:
(i)        spouse of the individual;
(ii)       brother or sister of the individual;
(iii)     brother or sister of the spouse of the individual;
(iv)     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;
(vii)    spouse of the person referred to in clauses (ii) to (vi).

 

One needs to be very cautious at the time of receiving the gift. Each and every gift needs to be examined from the angel of recipient. Readers may wonder to see the surprised outcome of above definition of relatives under section 56(2) of the Income Tax Act-1961. It may so happen that “X” is the relative of “Y” but “Y” may not be the relative of “X” under the I.T. Act-1961.

 

A lineal ascendant or descendant normally refers to a blood relative in the direct line. The lineal ascendant may not merely include father, mother, grandfather and grandmother, but also great grandfather and great grandmother and so on. Similarly, the lineal descendant will include not only children and grand children but also great grand children and their children as well. No limitation as to the degree of relationship is prescribed so that a lineal ascendant or descendant of not only first and second degree but also third and fourth degree and so on will also qualify as a relative. A gift from them would not be liable to tax under Sec. 56(2).

The query is pertaining to the definition of “Relative” for the purpose of taxation of taxability as gift under the Income Tax Act.

  1. First part: If the person is giving a gift to sister’s son or daughter:
    From the recipient angel, the person who is giving the gift is the brother of his/her mother. It will fall within the ambit of clause (iv) mentioned above. [Now, if suppose the reverse happens. The recipient is the Brother of mother of donor. In that case, recipient is not the relative of donor and hence gift received would be taxable if it exceeds Rs. 50,000/-, Interesting, isn’t it? ]
  2. Second Part: Gift received from Nana or Nani, would it be tax free?
    As already mentioned, any gift received from lineal ascendant / descendant is not taxable. Lineal ascendant or descendant is nowhere defined under the Income Tax Act-1961. In normal reference, the term is meant to indicate lineal movement of relationship on the paternal side, upwards and downwards. However, a closer analysis of few dictionary meaning of the word indicates a wider movement on the paternal side as well maternal side. In my considered opinion, even gift from grandfather or grandmother from maternal side (i.e., Nana & Nani) would fall within the meaning of word “Relative” and the amount received from them would be exempt. [Reference: Oxford Large Print dictionary & Law Lexicon (General Editor: Justice Y.V. Chandrachud)].

Query 2]

Can we save income tax by transferring monthly/ quarterly or yearly money in wife’s account for her expenses? If yes, then how much & in which clause? She is not earning and not paying any tax. [R.V.Deshmukh-rvdsh@rediffmail.com]

Opinion:

  1. The amount given by you to your wife for her expenses is not a deductible sum while working out your income tax liability. On the other side, amount transferred in wife’s account would not be treated as her income & nothing would be taxable in her hands also.
  2. One mute question here is, what will happen if your wife saves some portion of money given by you and earns from the investment of such funds? Under the Income Tax Act-1961, any income arising from assets transferred to spouse without adequate consideration is taxable in the hands of the transferor and not in the hands of transferee. However, if asset is acquired by the spouse out of pin money then the income from such assets cannot be clubbed with the income of her husband. It is supported by judicial pronouncement in the following cases:
    i) R.B.N.J Naidu Vs CIT (1956) 29 ITR 194 (Nag) and
    ii) R.Dalmia Vs. CIT (1982) 133 ITR 169 (Delhi).
    [Pin money is a reasonable allowance given to wife by her husband for clothing and usual household expenses].

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