Understanding Section 56(2) of the Income Tax Act is crucial if you’ve ever received a gift or unexpected income. This provision is the catch-all section that ensures that incomes not covered elsewhere in the Act don’t slip through the cracks.
What is Section 56(2)?
Section 56(2) includes several sub-clauses, each dealing with specific types of incomes like gifts, share premium, lottery winnings, & more. But the most discussed & relevant among them is Section 56(2)(x)—the clause that deals with taxation of gifts.
So if you've ever received a cash gift from a friend or relative, this section decides whether that money is tax-free or taxable!
Tax on Gifts Under Section 56(2)
Let’s get real—you are required to pay taxes if the gift value is greater than Rs 50,000, & the gift isn’t from a specified relative.
✅ Gifts from relatives are free from being taxed under this section.
❌ But gifts from non-relatives? If the aggregate value exceeds ₹50,000 in a financial year, it becomes taxable under the head "Income from Other Sources."
Here's where many people get caught—birthdays, weddings, or festivals might come with generous gifts, but if you don’t check who they're from, you might be adding to your tax liability unknowingly.
Who Qualifies as a “Relative”?
The Income Tax Act defines “relative” in a very specific way. Parents, siblings, spouse, lineal ascendants or descendants, & even in-laws are covered. But your BFF? Not a relative in the eyes of the tax department.
This clarity is essential, especially when people assume that any gift received is tax-exempt. Section 56(2) lays down that only gifts from defined relatives enjoy tax-free status.
What Types of Gifts are Covered?
- 💰 Cash gifts
- 🏠 Immovable property (like land or house) received without adequate consideration
- 💍 Movable property (like shares, jewellery, paintings, etc.)
The valuation of these items, especially when received at undervalued rates or for free, is closely monitored.
Other Incomes Covered Under Section 56(2)
It’s not just gifts. This section has become a basket clause for other unaccounted incomes. Here are a few examples:
- Share premiums received by companies from residents above the Fair Market Value.
- Interest on compensation or enhanced compensation (e.g. land acquisition cases).
- Forfeiture of advance money for the sale of capital assets.
- Income from properties received without adequate consideration.
The overarching idea is simple: “Income of every kind which is not to be excluded from the total income” must be taxed.
Is There Any Way to Save Tax Under Section 56(2)?
Yes! Apart from gifts from relatives, other exemptions include:
- Gifts received at the time of marriage.
- Inheritances via will or succession.
- Gifts from local authorities or under registered trusts."
- Gifts received during the death of the donor (in contemplation of death).
Common Misconceptions Cleared
❌ "Gift mil gaya toh tax ka kya lena dena?"
✅ If it’s from a non-relative & the value crosses ₹50,000, you're liable!
❌ "Shares mujhe discount pe mile the!"
✅ If shares are acquired at a price lower than Fair Market Value, the difference is taxable under Section 56(2). "
Real-Life Example
Rahul receives ₹1.2 lakhs from a friend for his birthday in cash. He’s thrilled—but unfortunately, that ₹1.2 lakhs becomes fully taxable under Section 56(2)(x). If the amount was ₹49,000, it would’ve been fully exempt. That ₹1,000 difference? It makes the entire gift taxable, not just the excess.
Wrap-up & Clickworthy CTA
Section 56(2) might sound technical, but it plays a huge role in shaping your tax liability when it comes to gifts, property transfers, or even shares. If you’re unsure whether that birthday cash or equity grant is taxable, don’t guess, ask a CA!
Want help with calculating gift tax or handling ITR disclosures?
👉 Let our experts at Callmyca.com do the heavy lifting for you because guessing tax rules can be an expensive mistake.
