Income tax is the amount which gets collected by the government based on your annual income and profits. There are two types of tax; one is the direct tax (like the income tax which is paid directly to the government) and the other one being an indirect tax (which is paid while buying a product or service to the manufacturer or service provider). This article will concentrate on the income tax laws relating to the direct tax. 

The Income Tax Act of India was initially introduced in the year 1961. As the years passed by, due to inflation and other social-economic situations of the country, this law has been amended several times to stay in tune with the realities of the world. Income taxes are one of the most significant sources of revenue for the government. This amount is a form of inevitable imposition on almost all the citizens of India to fulfil the development and defence needs of the nation.

However, income tax laws differ for the various forms of income which an individual earns. Most people have queries like:

Does gift money get taxed?” Or “How much money can a husband give his wife tax free?” while filing their returns. Thus, it is essential that you understand the laws related to taxation of income, loans, gifts and cash credits before filing your income tax:

The Income Tax Laws for Loans

The tax rebates and benefits vary for different types of loans, including home loans, education loans, personal loans, and car loans. Here is a quick look at the benefits offered:  

  1. Education Loans

Due to the significant increase in educational costs, several people opt for education loans, especially when they opt for professional courses or go outside the country to study. The government provides relief and rebates under Section 80E on education loans:

  • Only the interest amount which you pay towards a specific education loan is eligible for the deduction of taxes, and there is no limit to this amount 
  • The tax benefits of an education loan can be accessed for the entire loan tenure or a period no longer than 8 years 
  • You can avail the tax benefits of an education loan only once you have started paying off the loan amount 
  1. Home Loans

Home loans are usually of a significant amount, and their tenure tends to last for several years. That is why it is essential to know about the tax benefits on these loans:

  • Under Section 80C, up to INR 1, 50,000 can be deducted from your taxable income in a year based on the principal amount of the loan
  • Under Section 24(b), you can claim a deduction of up to INR 2, 00,000 if in case you have taken a home loan for a self-occupied house
  • The entire interest of the home loan can be claimed if it is taken for a house which is let-out under Section 24(b) of the ITA
  • If you are a first time home buyer, you can claim the deductions made against the interest paid towards the home loan; this amount can be up to a maximum value of INR 50,000 per year
  1. Automobile Loans

Automobiles come under the luxury items, and no form of tax benefit is available on the same. However, if you have borrowed a car loan for purchasing a vehicle for commercial purposes as well, you can avail a deduction proportionate to the same under Section 80C.

  1. Personal Loans

When the personal loan is sought for starting a business or purchasing a home, only then would you be eligible for tax exemption. Other than this scenario, no other form of personal loan offers a tax rebate to an individual. In case of business loans, the interest which you have to pay towards the loan would be deducted from the gross revenue of your firm before arriving at a gross income amount. Similarly, loans offered by friends, family and relatives are neither taxed nor eligible for any tax benefits.

Income Tax Laws for Gifts and Cash Credits

According to the Gift Tax Act, 1958, the tax on any form of gift would have to be levied by the donor. Thus, people ended up paying a tax on the money or a valuable gift given to a friend or relative. Later on, the Finance Act was introduced in 2004 under Section 56(2)(v), according to which the recipient would be liable to pay the tax on the received gift. Here’s how the law works:

  1. Gift in the form of Money

When a gift amount of more than INR 50,000 is given to a friend or family member, it would be taxable in the hands of the recipient just like any other income. However, if in case the aggregate value of the gift in the form of money is less than INR 50,000, the recipient would be exempted from paying tax. On the other hand, if you are lending your friend or family money – no matter the amount – neither you nor the borrower will be taxed anything. This is applicable only when there is an agreement to pay the amount back, with or without interest. In the event that you charge your friend or relative an interest, that will be counted as ‘income from other sources’ for you.  

  1. A Gift in the Form of Immovable Property

Most people would be curious to know the answer to “how much money can be legally given to a family member as a gift in 2019?” If you gift an immovable property as a gift to anyone, they would be liable to pay the income tax on the same if in case the value of stamp duty of the gift exceeds INR 50,000 and they receive it without any consideration. Furthermore, if an inadequate amount of consideration is gifted wherein the difference amount between the stamp duty and the consideration exceeds INR 50,000 and exceeds 5% of the consideration as well, the difference would be taxable, and the recipient would be liable to pay this. 

Except for the 5% of consideration condition, all the above points are applicable when a movable gift is received as well. In such a case, the FMV or the fair market value of the movable property is considered instead of the value of stamp duty. However, it is important to note that typical movable gifts like bikes and cars are not counted as movable property. Additionally, any form of gift which is received by an immediate relative, on occasion like marriage or as a result of will or inheritance does not come under taxable gifts.

Tax on Cash Credit

There are five categories of income on which the income tax is levied; these include house property, salary, capital gains, business income and income from all other sources. Tax evaders are penalized through the special provisions given under Indian Income Tax. Except for the capital gains, every other type of income is a form of revenue income, and an individual is liable to pay taxes for the same if received in any given financial year. The tax on your capital asset is dealt with by capital gains. As a basic rule, one must remember that all forms of income, unless specifically exempted, are taxable. Whereas, the capital gains income, unless it is brought explicitly within the taxable bracket, is not taxable.

If unexplained cash credits are found in your records, a flat rate of 60% will be levied, alongside a surcharge of 25% and a penalty of 6%. The total tax would be around 83.25%, and no deduction or loss can be used to mitigate the same. As per Section 68, any cash credit that is not explained, the source of credit not clarified, or the explanation offered by the taxpayer is not satisfactory, will be considered unexplained cash credit.

To Sum up: Things to Remember about Taxation of Loans, Gifts, and Cash Credits

  • Upon purchasing a property, you can claim the deductions for the stamp duty and registration charges
  • The deduction made towards the interest amount paid for the repayment of educational loans can be claimed under Section 80E
  • You can claim the deductions which are made towards the educational loan for up to 2 children
  • Deduction of payments towards the principal amount of a home loan can be claimed under Section 80C
  • The entire interest on a home loan taken towards owning a property can be claimed through Section 24(b)
  • First time home buyers can claim deductions under Section 80EE
  • There is no tax benefit offered for the loan taken for purchasing a vehicle as it comes under luxury items
  • The tax benefits similar to those of business loans can be acquired when the loan is taken for the purchase of a vehicle meant for commercial use
  • No form of personal loan is eligible for tax benefits, except for the case when you are buying a home or property, or starting a business
  • In case of gifts given in the form of money, movable or immovable property, the receiver is liable to pay the tax except under some conditions
  • While accepting payments, it is advised to use demand draft or account payee cheque as the mode of the transaction to help keep a record of the source of all income and gifts 

Thus, preparing your annual income tax return can become very complicated if you aren’t aware of the relevant laws. Furthermore, you might end up not making the most of available tax benefits if you are unaware of the different laws. Remember to keep track of all your income sources, make note of all the gifts and satisfactorily explain all cash credits while filing your return to make sure you undertake the process correctly.