Gift Taxation
A transfer of property, money, or assets from one person to another without any consideration or compensation. This means that the person receiving the gift does not provide anything in return for the gift received.
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Definition of “Relative”
As per Sub-section (5) Section 85of Income Tax Ordinance, 2001
(i) “relative” in relation to an individual, means —
(a) an ancestor, a descendant of any of the grandparents, or an adopted child, of the individual, or of a spouse of the individual; or
(b) a spouse of the individual or of any person specified in clause (a);
(grandparents, parents, spouse, brother, sister, son or a daughter)
(ii) jurisdiction with zero taxation regime means jurisdiction as may be prescribed
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A gift can be in
Monetary:- If the gift is in monetary terms such as cash or cash equivalents, it must be transferred via proper banking channels,
- Such as a crossed cheque or online transfer.
- The sender must hold a National Tax Number (NTN).
Consequences of not meeting the requirements of transaction – As per Sub-section (3) of Section 39 of Income Tax Ordinance, 2001
Any amount received as a loan, advance, deposit [for issuance of shares] or gift by a person in [a tax year] from another person (not being a banking company or financial institution) otherwise than by a crossed cheque drawn on a bank or through a banking channel from a person holding a National Tax Number shall be treated as income chargeable to tax under the head “Income from Other Sources” for the tax year in which it was received.
Non-monetary:- If the gift transferred is a plot of land, immovable property or any other non-monetary assets
- gift deed that mentions the names of both parties, the transferor and the transferee.
Consequences of not meeting the requirements of transaction – As per clause (ia) of Sub-section (1) of Section 39 of Income Tax Ordinance, 2001: –
Any amount or fair market value of any property received without consideration or received as gift, other than gift received from [relative as defined in sub-section (5) of section 85] shall be treated as income chargeable to tax under the head “Income from Other Sources” for the tax year in which it was received.
Withholding on the transfer of property as Gift – Circular No. 10 of 2015
The gift of immovable property among immediate family members will not be subjected to withholding tax under Section 236-K (Sales of immovable property) of the Income Tax Ordinance, 2001, at the time of registration. This decision addresses conflicts and grievances by affirming that such familial gifts are genuine and should not incur taxes, in line with Section 79’s non-recognition of gain or loss on asset transfers by gift.
Capital Gain on Transfer of any Asset (Immovable Property) as Gift
As per clause (c) of Sub-section (2) Section 79 of Income Tax Ordinance, 2001
79. Non-recognition rules: – (1) For the purposes of this Ordinance and subject to sub-section (2), no gain or loss shall be taken to arise on the disposal of an asset –
(c) by reason of a gift of the asset [to a relative, as defined in sub-section (5) of section 85];
Explanation: – There will be no capital gain or capital gain tax on the transfer of immovable property or any other asset in transaction of gift between relatives as defined above.
Specific Cases:-
Gift to a person not liable to file Income Tax Return under section 114 of Income Tax Ordinance, 2001 is valid if the gift can be verified from supporting evidence and Income Tax Return of Donor – 2012 PTD 1750
Requirements of Gift Deed:-Addition of Gift received from blood relative. Neither any gift deed is required nor, the gift needs to be made through banking channel in case it is made between blood relatives. (ATIR ITA 1234-MB -23. S 39 & S 122)
Where the donor and the donee are blood relatives unregistered gift deed is admissible evidence. Provided there is a declaration of gift by the donor, acceptance by the donee and delivery of possession of the subject of the gift. (2006 PTD 529 = (2005) 92 TAX 205. S 12 (18) ITO 1979 = S 39 & 101)
Spouse Cash gifts (other family members) without proper banking channel – 2008 PTD (Trib) 19
In the above case – A wife received cash gift from her husband and section 12(18) of the Income Tax Ordinance, 1979 was under scrutiny which is conceptually similar to section 39(3) of the Income Tax Ordinance, 2001.
For the foregoing reasons, I am of the considered view that principle of everything should be done in a particular manner is not attracted in the instant case, therefore, the learned CIT (A) was justified to deviate from the same while deleting the addition made under section 12(18) regarding cash gift made in favour of the assessee by her husband. I do hereby concur with the findings given by my learned brother, Mr. Munsif Khan Minhas, Judicial Member.”
Taxation of Gift Received in Marriage
Gifts from Relatives (as defined in Sub-section 5 of Section 85):
Cash Gifts:
Requirements:
- Must be transferred via proper banking channels (crossed cheque or online transfer).
- The sender must hold a National Tax Number (NTN).
Consequences of Non-compliance:
- If these conditions are not met, the cash gift will be treated as income chargeable to tax under the head “Income from Other Sources” for the tax year in which it was received, as per Section 39(3).
Additional Considerations:
For cash gifts between blood relatives, a gift deed is not required, nor does the gift need to be made through banking channels, as per ATIR ITA 1234-MB-23.
Non-Cash Gifts (e.g., immovable property):
Requirements:
- A gift deed mentioning the names of both parties (transferor and transferee).
Consequences of Non-compliance:
- If the gift does not meet the criteria, the fair market value of the property will be treated as income chargeable to tax under “Income from Other Sources,” as per Section 39(1)(ia).
Additional Considerations:
- An unregistered gift deed is admissible as evidence if there is a declaration of gift by the donor, acceptance by the donee, and delivery of possession of the gift, as per 2006 PTD 529.
Capital Gain Tax:
- No capital gain tax on the transfer of immovable property between relatives, as defined in Section 85(5), as per Section 79(1)(c).
Withholding Tax: Circular No. 10 of 2015:
- Gifts of immovable property among immediate family members are not subject to withholding tax under Section 236-K.
Gifts from Friends in Marriage: –
Gifts received in marriage from friends are taxable under the head “Income from Other Sources” for the tax year in which it was received, as per Sections 39(3) and 39(1)(ia). This applies regardless of whether the gifts are made through proper documentation or not.
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