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Gift received by a Non-Resident shall be deemed to accrue or arise in India

Gift received by a non-resident from a resident person shall be deemed to accrue or arise in India – Finance Bill 2019

[Applicable from Assessment Year 2020-21]

Section 56(2)(x) of the Income-tax Act provides that where any sum of money or property (whether immovable or movable) received by a person without consideration or for inadequate consideration, it shall be taxable under the head ‘Income from Other Sources’ in the hands of such person. However, no tax shall be payable if money or property is received from specified person (say, relatives) or on specified occasions (say, on the occasion of marriage).

Though Section 56(2)(x) applies in case of every person, but it has been reported that gifts by a resident person to a person outside India are claimed to be non-taxable in India as the income does not accrue or arise in India. To ensure that such gifts made by residents to persons outside India are subjected to tax in India, a new clause is inserted in Section 9 to provide that any income arising from payment of any sum of money, or transfer of any property situated in India, by a person resident in India to a person outside India shall be deemed to accrue or arise in India. However, the exemption provided under section 56 shall continue to apply even in such cases. In other words, no tax shall be levied if property is received by person outside India from a relative resident in India or on the occasion of his marriage.

Though the provisions of Section 9 has been amended but the ultimate taxability of such gifts shall be decided in accordance with provisions of relevant DTAA. If provisions of DTAA are more beneficial, then the non-resident person can choose to apply the provisions of DTAA. All double taxation agreements, India has signed with the foreign countries contain a residuary article ‘Other Income’ which deals with all other incomes not dealt with in any other articles of the said DTAA. Some of the DTAAs allocate the taxing rights to the source country if such residuary income is not dealt with in any other provision of that DTAA, while as some DTAAs provide the taxing right to the resident country only. Thus, if such residuary income is not taxable in India as per DTAA, the deeming fiction introduced in the domestic law can be outweighed by the DTAA. In other words, even if income by way of gift received by non-resident from a person resident in India is deemed to accrue or arise in India, a person can take recourse of the provisions of DTAA to escape from this deeming fiction.

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