Who is a Relative as per the Income Tax Act?

Introduction

The term "relative" plays a crucial role in income tax laws in India, especially when it comes to exemptions, deductions, and taxation of gifts. The Income Tax Act, 1961 defines who qualifies as a relative to determine tax liabilities on transactions like gifts, capital gains, and clubbing of income. Understanding this definition helps taxpayers plan their finances efficiently and avoid unnecessary tax burdens.

Definition of Relative Under the Income Tax Act

The Income Tax Act, 1961, particularly under Section 56(2)(x), defines a "relative" for tax purposes. This is particularly relevant when it comes to the taxation of gifts. According to this section, gifts received from a "relative" are exempt from taxation, while gifts from non-relatives beyond a specified limit are subject to tax.

Under the Act, the following persons are considered relatives:

For an Individual:

1. Spouse

2. Brother and sister of the individual

3. Brother and sister of the spouse

4. Brother and sister of either parent

5. Any lineal ascendant or descendant of the individual (Parents, Grandparents, Great Grandparents, Children, Grandchildren, Great Grandchildren)

6. Any lineal ascendant or descendant of the spouse

7. Spouse of the above-mentioned persons

For a Hindu Undivided Family (HUF):

All members of the HUF are considered relatives.

Importance of the Definition in Income Tax Planning

1. Tax-Free Gifts

Under Section 56(2)(x), gifts received from a "relative" are not taxable, regardless of the amount. However, gifts received from non-relatives exceeding ₹50,000 in a financial year are taxable as "Income from Other Sources."

2. Clubbing of Income

If income is transferred to a spouse or minor child, it may be clubbed with the transferor’s income under Section 64 of the Act. Understanding the definition of a relative helps in tax-efficient income planning.

3. Capital Gains Exemption

In cases of property transfer among relatives, capital gains tax may not be applicable if structured correctly. However, transactions must comply with the provisions of the Act.

4. Deductions and Exemptions

Certain deductions, such as medical insurance premium under Section 80D, allow claims for relatives, including parents, spouses, and dependent children. Similarly, Section 80G donations allow exemptions when contributions are made in the name of relatives.

Conclusion

Understanding who qualifies as a relative under the Income Tax Act, 1961 is crucial for effective tax planning. Whether it’s gifting, tax-saving investments, or clubbing of income, knowing the tax implications related to relatives can help taxpayers optimize their finances and reduce liabilities legally.