Gift transactions taxable or exempted

sir,
It assessess cash Gift to grandson rs:1 crore amount through on bank channel mode f.y.24-25 but assessess capital account balance rs:50 lacs in books as on Gift transaction date.
Question:
Assessess Gift transaction taxable or exempt f.y.24-25 .

@Sundaraiah_Kollipara

  1. Gift from Grandparent to Grandson

Gifts made by a grandparent to their grandson are exempt from tax under Section 56(2)(x) of the Act if they are given:
Out of natural love and affection; and
Without any consideration.

Since a grandson is a relative as defined under Section 56, the gift of ₹1 crore is not taxable in the hands of the grandson.

  1. Assessing the Source of the Gift

The assessee (grandparent) gifting ₹1 crore should demonstrate:
The source of funds for the gift, especially since the capital account balance in the books is only ₹50 lakhs.
Supporting documentation, such as:
- Bank account statements showing the withdrawal or transfer of ₹1 crore.
-Any other legitimate sources of funds (e.g., sale of assets, loans).
( Note- His bank account showed adequate funds at the time of executing the gift,establishing its creditworthiness.)

If the source of the ₹1 crore gift cannot be substantiated, the tax officer may:

Question the genuineness of the transaction.
Treat the unexplained portion as unexplained income under Section 68, leading to taxation.

  1. Implications for the Grandson

The gift is exempt for the grandson since it is from a relative.
However, the onus is on the grandparent to prove the source of the funds.

  1. Potential Taxation Scenarios

If Source is Explained:
The gift remains tax-exempt for the grandson, and there is no tax liability for the grandparent beyond any routine tax on income used for the gift.
If Source is Unexplained:
The unexplained portion (₹50 lakhs or more) may be added to the grandparent’s taxable income as unexplained credits, attracting tax and penalties.

  1. Compliance Requirements

Gift Deed:
It is advisable to execute a gift deed to document the transaction formally, specifying the relationship and details of the gift.
Bank Record:
Ensure the transfer is through a traceable bank channel.

Conclusion

The gift of ₹1 crore to the grandson is exempt from tax for the grandson as per Section 56(2)(x). However, the grandparent must substantiate the source of funds for the ₹1 crore gift. If the source cannot be explained, the unexplained portion may be treated as income and taxed accordingly.

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