Definition of Relatives for the purpose of Income Tax Act, 1961

Who is Relative under Income Tax Act?

Section 2(41) of the Income Tax Act, 1961 gives the definition of the term ‘Relatives’ as below:

However, the definition of ‘Relative’ under section 2(41) is very limited and is not applicable for all the purposes under the provisions of the Income Tax Act, especially in respect of taxation of gifts under section 56 of the Act.

Is gift taxable under Income Tax Act?

It is to be noted that gifts received by any person are subject to Income Tax as per the provisions of section 56(2). Gifts received by any person are taxable under the head of “Income from other Sources” while ITR filing online. It is immaterial whether the gift is received in the form of cash or in the form of property. But the Income Tax Act allows an exemption from tax in case of gifts are received up to the threshold of Rs. 50,000 during any year. It should also be noted that the threshold limit of Rs. 50,000 is for an aggregate of the amount received from one or more persons. Thus, if a person receives gifts of an amount below Rs. 50,000 from more than one person but the aggregate of all such amounts exceed Rs. 50,000, then such amount received as a gift becomes taxable.

Suppose, Ram receives Rs. 20,000 from his friend Shyam and Rs. 40,000 from Suresh in FY 2021-22. Here, the aggregate amount received by Ram is Rs. 60,000 which breaches the threshold limit. Therefore, the entire amount of Rs. 60,000 is taxable in the hands of Ram.

But, to provide relief to genuine gifts between relatives, Section 56(2) itself exempts gift received by any person from his/her relatives in the case of an individual. So, it becomes important to understand the meaning of the term ‘Relatives’ so that the benefit of exemption can be taken by the taxpayer in terms of the Income Tax Act.

In this article, we will not discuss the taxability of gifts in an elaborate manner and will have a detailed discussion in some other article. In this article, we are restricting ourselves only up to the definition of the term ‘Relatives’ for the purpose of taxability of gifts.

Definition of relatives for the purpose of gifts

We have read above that gifts received by any person from his/her relatives are exempt from Income Tax otherwise any gift beyond Rs. 50,000 in aggregate in any year are taxable. So, it is important to know about the definition of the term ‘Relatives’. We will reiterate the fact that the definition of the relatives as given in section 2(41) of the Income Tax Act shall not apply in the case of taxation of gifts.

What a ‘Relative’ means for the purpose of gifts??

The answer to this question lies in Explanation to clause (vii) of section 56(2). So, we will move ahead to read the aforesaid explanation to understand whether the gift received in our case is taxable or not.

Explanation to clause (vii) of Section 56(2) gives the definition of ‘Relatives’ for the purpose of exemption from income tax in the case of gifts as follows:

 Now, it’s the time to decodify the above definition and understand in-depth and in an elaborate manner who is relative for the purpose of section 56(2)(x) in the case of an individual. Continue Reading….

Detailed list of Relatives u/s 56(2) of the Income Tax Act

If any gifts are taken by any individual from any of the above relatives, then there is no threshold limit of the amount of gift. It means that no income tax shall be chargeable for any gifts received from the specified relatives as in the above table.

Disclaimer: The above article is meant only for informative purposes and ‘Taxwink’ is not responsible for the correctness and accuracy of the same. Readers are requested to act diligently and under the consultation of any professional before applying the information contained in this article.