Taxation For Gifts And Professional Income

KEY POINTS:

• If a foreign national working in India is a Resident and the payment is towards professional fees, the deduction of income tax at source u/s 194J should have been made at 10 per cent (at the time of credit or payment, whichever is earlier, when the aggregate sums credited or paid during the financial year exceed Rs 30000).
• Gifts from relatives are not included within the definition of income under the Income Tax Act, 1961, and are not taxable.
• For gifts made in cash, there ought to documentary evidence such as a gift deed or gift letter that should be kept on record. Moreover, if the amount exceeds Rs 20000, it would be preferable to give the gift by account payee cheque.

Q 1) I have a query on TDS on consulting fees to foreign nationals working in India who have a PAN number. We deduct 20 per cent as TDS on consulting fees. We have terminated the services of this individual, and he now wanted us to deduct TDS at 10 per cent. Please clarify the correct rate of TDS.

- J Mohan

A: You have not mentioned whether the foreign national working in India is a Resident or a Non-Resident. If the said foreign national is a Resident and the payment is towards professional fees, the deduction of income tax at source u/s 194J should have been made at 10 per cent (at the time of credit or payment, whichever is earlier, when the aggregate sums credited or paid during the financial year exceed Rs 30000). However, if the deductee has not stated his PAN, the deduction ought to be made at 20 per cent instead of at the specified rate.

Further, on termination, the TDS will depend on whether the said person has continued to remain a Resident or his residential status has changed to Non-Resident. In case the status has not changed, there will be no change in the rules regarding TDS as stated above even if the payment is made in the subsequent financial year. If his residential status has changed to Non-Resident and the financial year has changed, the rate of deduction of tax at source for the professional fees paid will be 30 per cent as provided by the Finance Act, 2012, irrespective of the amount paid to him.

Q 2) My grandparents are senior citizens and they wish to gift me a certain amount. Can they gift me cash? If yes, is there any limit for this under the Income Tax act or any other law?

- Rini Massey

A: Gifts from relatives are not included within the definition of income under the Income Tax Act, 1961, and being a capital receipt, are not taxable. As the same is not taxable, the quantum of the gift has no relevance. The relatives are defined under Section 56 of the Income Tax Act, 1961, as follows:

1. In case of an individual –
   
   a) Spouse of the individual
   b) Brother or sister of the individual
   c) Brother or sister of the spouse of the individual
   d) Brother or sister of the either of the parents of the individual
   e) Any lineal ascendant or descendant of the individual
   f) Any lineal ascendant or descendant of the spouse of the individual
   g) Spouse of the person referred to in items (b) to (f) above
   
   
2. In case of a Hindu Undivided Family, any member thereof.

As regards payments in cash, there ought to documentary evidence such as a gift deed or gift letter that should be kept on record. Moreover, if the amount exceeds Rs 20000, it would be preferable to give the gift by account payee cheque.

Besides, it may necessary to prove the source of the income of the donor(s) if they are not filing their return of income.