Taxability of Virtual Digital Assets Received as Gifts – Section
56(2)(x)
In recent years, the
popularity of Virtual Digital Assets (VDAs) such as cryptocurrencies and
NFTs has grown significantly. With this rising popularity, the Income Tax
Department has clarified the tax treatment of VDAs received as gifts,
particularly under Section 56(2)(x) of the Income-tax Act, 1961. This
article provides a simple yet comprehensive explanation of the tax implications
when Virtual Digital Assets are received as gifts.
What is a
Virtual Digital Asset (VDA)?
A Virtual Digital
Asset includes:
- Cryptocurrencies like Bitcoin,
Ethereum, etc.
- Non-Fungible Tokens (NFTs)
- Any other digital asset notified by
the government
Background:
Inclusion of VDAs under Taxable Gifts
Earlier, gifts such as
cash, immovable property, jewellery, shares, etc., were already taxable under
Section 56(2)(x) if received without or for inadequate consideration.
The Finance Act, 2022 extended the scope of this provision by including
VDAs as 'property' for tax purposes. This amendment came into effect from 1st
April 2023 (Applicable for AY 2023-24 onwards).
When is a
VDA Gift Taxable?
Under Section 56(2)(x),
VDAs received without consideration (i.e., as a gift) or for a price less
than fair market value (FMV) are taxable in the hands of the
recipient if the total value exceeds ₹50,000.
Two scenarios where tax
applies:
1. Received
without consideration (Free Gift): If FMV of the VDA
received > ₹50,000 → Entire FMV is taxable.
2. Received
for inadequate consideration: If VDA is bought at a
price lower than FMV and the difference > ₹50,000 → Only the
difference is taxable.
Example:
|
Case
|
FMV
of VDA
|
Amount
Paid
|
Taxable
Amount
|
|
Gift
received without payment
|
₹70,000
|
₹0
|
₹70,000
|
|
Bought
at ₹40,000, FMV is ₹1,00,000
|
₹1,00,000
|
₹40,000
|
₹60,000
|
|
Gift
received worth ₹40,000
|
₹40,000
|
₹0
|
Not
taxable (Below ₹50,000 limit)
|
Rate of Tax
on Gifted VDAs
If taxable under Section
56(2)(x), the value of VDA is added to 'Income from Other Sources' in
the recipient’s ITR and is taxed at the applicable slab rate of the
recipient.
Please note: This is different
from taxation under Section 115BBH (30%) which applies when VDAs are sold
or transferred.
Exceptions
– When VDA Gifts Are Not Taxable
No tax is payable if VDAs
are received:
- From a relative (e.g. spouse,
parents, siblings, lineal ascendants or descendants)
- On the occasion of marriage
- Under a will or inheritance
- In contemplation of death of the
payer
- From certain registered trusts,
charitable institutions, or government bodies
Important
Definitions
- Fair Market Value (FMV):
The market price of the VDA on the date of receipt, as determined by
prescribed valuation rules.
- Relative (as per Income Tax Act):
Includes spouse, siblings, parents, children, grandparents, grandchildren,
and their spouses.
Conclusion
With the inclusion of
VDAs in the definition of "property" under Section 56(2)(x), gifting
crypto or NFTs now has clear tax implications. It's important for taxpayers
to maintain proper records, obtain fair valuations, and disclose
such gifts in their income tax returns, wherever applicable. Also, both givers
and receivers should be aware of the taxability rules to avoid
penalties or scrutiny during assessment.
Disclaimer: All the Information is based on the notification, circular advisory and order issued by the Govt. authority and judgement delivered by the court or the authority information is strictly for educational purposes and on the basis of our best understanding of laws & not binding on anyone.
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