Guide to Section 56 of the Income Tax Act, 1961

The Income Tax Act classifies income sources under 5 main heads. These consist of income from house property, income from salaries, profits and gains from business or profession, income from other sources, and capital gains. 

 

Section 56 of the Income Tax Act includes the taxation on earnings that fall under the head of Income from Other Sources. This includes interest earned from security, immovable properties, and income from rental properties, equipment, or gifts. Section 56(2)(x) of the Income Tax Act elaborates on the taxation on gift exchange. 

As per Section 56(2)(x), all cash or cash equivalent gifts, movable, or immovable property gifted are taxable. 

 

Key points to note:

• Gifts in the form of cash and cash equivalents, property, or in-kind in a FY are taxable

• Gifts under ₹50,000 are exempt from taxation for a financial year

• You must pay tax on all gifts that have a combined value of over ₹50,000 within a fiscal year

• Any cash an employee receives from their employer is classified as salary and taxed under 56(2)(x) of the Income Tax Act

 

There are few exemptions to Section 56(2) of the Income Tax Act, as follows:

1. Gifts from relatives  

2. Gifts received as a wedding present  

3. Gifts from trusts, educational institutions, hospitals, or medical institutions  

4. Gifts from any trust or institution u/s 12A, 12AA or 12AB 

5. Gifts received as a part of a will after the death of the donor 

 

However, you cannot consider gifts received from the local authority under this section. Additionally, the term ‘relative’ extends to siblings, spouse, spouse’s sibling, any blood relative, parent sibling, blood relative of spouse, or offspring of the blood relative or spouse. 

All immovable property received without consideration (without being paid anything for it), which includes land, buildings or both, are taxable. 

 

Key points to note:

• Stamp duty value of such property must be more than ₹50,000

• If the acquired property is for consideration with a stamp duty value over ₹50,000 or 10% of consideration, then you must pay income tax on stamp duty as well

• Movable personal property includes gold or other jewellery, bullion, stocks, securities, paintings, sculptures, archaeological collections, etc.

• For movable personal property with a global FMV of more than ₹50,000, you must pay tax according to Section 56(2) of the Income Tax Act

• If you consider less than the overall fair market value of the property, then the entire excess FMV will be taxable over ₹50,000