Non-relatives

Receive a gift of shares or securities worth more than Rs 50,000 in a year, and it is normally taxable as income from other sources, unless it comes from a relative, which the law exempts. The catch is that the Act's list of who counts as a relative is narrower than most people assume.

The workbook names the excluded group directly: step-brothers and step-sisters, nephews and nieces, and cousins are not deemed relatives for this exemption, however close the family bond actually is.

The exemption this list attaches to. Where an individual receives shares or securities without consideration, or for inadequate consideration, the excess over their fair market value is taxable if the aggregate exceeds Rs 50,000 in the year, unless the gift comes from a specified relative.

Who is a relative, for an individual, the Act's own list: spouse; son or daughter, including step-children and adopted children, and their spouses; parents and step-parents and their spouses; siblings and their spouses, including half-siblings; grandparents and great-grandparents on both sides and their spouses; and specific named uncles and aunts, a father's brother and sister and a mother's brother and sister, and their spouses.

Who is not, stated explicitly: step-brother or step-sister, nephew or niece, and cousins. A gift of shares from any of these, above the Rs 50,000 aggregate threshold, is taxable in full as income from other sources.

HUF is different. Where the recipient is a Hindu Undivided Family, every member of the HUF is treated as a relative. The detailed individual list above does not apply.

Ms Deshmukh receives shares worth Rs 1,20,000 as a gift from her cousin. Because a cousin is expressly excluded from the definition of relative for this provision, and Rs 1,20,000 exceeds the Rs 50,000 threshold, the entire Rs 1,20,000 is taxable as income from other sources.

Had the same shares come from her father's brother instead, the gift would be fully exempt. A father's brother is explicitly listed as a relative, even though a cousin, who is often just as close, is not.

Now compare her nephew, who separately receives shares worth Rs 40,000 from Ms Deshmukh. Because Rs 40,000 is below the Rs 50,000 aggregate threshold, it would be exempt on that ground alone regardless of the relative test, but had the value been Rs 80,000, the nephew's exclusion from the definition of relative would make the full Rs 80,000 taxable in his hands.

Chapter 9, section 9.4.3 ('Cases when income is not chargeable to tax'), lists the persons treated as relatives for gift taxation and then states directly that the following persons are not deemed as relatives: step-brother or sister, nephew or niece, cousins. Expect a question that names one of these three excluded relationships and asks whether a gift from them is taxable.

• Cousins, nephews, nieces and step-siblings are explicitly not relatives for this provision, however that feels counter-intuitive.
• The Rs 50,000 threshold is an aggregate across the year, not per gift or per relative.
• For an HUF recipient, every member is a relative. The individual exclusion list only applies when the recipient is an individual.
• This 'relative' definition is specific to gift taxation under section 56(2). Do not carry it over to other provisions of the Act, such as clubbing of income or succession law, that define family relationships differently for their own purposes.