When a Family Gift Becomes Taxable Income

A gift of jewellery between two people who have built a life together can expose a difficult boundary in tax law. The transfer may express affection and family continuity, yet the recipient’s tax treatment depends on whether the donor falls within an enumerated statutory relationship. For same-sex partners, that boundary raises a constitutional question, because Indian law does not presently offer them the route to marital recognition that is open to heterosexual couples.

The pending Karnataka litigation illustrates the issue. It should not, however, be described as an exemption already secured or a judgment already delivered. This analysis examines the statutory problem, the competing constitutional arguments and the practical consequences for family wealth planning, including the transition to the Income-tax Act, 2025.

01What the Karnataka challenge is about

In Anurag Kalia and another v. Union of India and another, W.P. No. 28761 of 2025, the petitioners challenge the exclusion of same-sex partners from the relative-based exception in the fifth proviso to section 56(2)(x) of the Income-tax Act, 1961. As reported, one partner gave the other a 22-carat gold bracelet, a family heirloom received from his father, on their relationship anniversary. The petitioners were advised that, because they are not legally recognised as spouses, the bracelet would have to be valued and offered to tax as income. The bracelet has been reported as weighing 14.41 grams and valued at ₹1,15,500.¹

The petition seeks to strike down the provision to the extent that it excludes same-sex partners or, in the alternative, to read “spouse” as including same-sex partners in comparable circumstances. The matter is being heard by Justice B.M. Shyam Prasad sitting singly. Both sides were heard on 9 October 2026 and the petitioners’ rejoinder was reported on 12 October 2026. The Court is reported to have listed the matter on 2 November 2026 for clarification on certain documents, after which judgment is expected to be reserved.²

The distinction matters. A hearing report identifies the arguments advanced; it does not establish that the Court has accepted any of them. Until the operative order is available, advisers should not suggest that a same-sex partner’s claim to spousal status for tax purposes has been judicially recognised.

02The charge is income tax, not a separate gift tax

Section 56(2)(x) brings specified gratuitous or inadequately priced receipts within “income from other sources”, subject to its conditions and exclusions. The familiar expression “gift tax” can mislead: the charge is income tax in the recipient’s hands, not a levy under the former Gift-tax Act. The provision also distinguishes between money, immovable property and specified movable property; it does not tax every object exchanged between partners in the same way.³

For specified movable property received without consideration, the threshold is an aggregate fair market value of ₹50,000 in the year. Once that threshold is crossed, the whole aggregate value is charged, not merely the excess. Jewellery is a specified category. On the reported value, a bracelet worth ₹1,15,500 would therefore be chargeable in full, not as to ₹65,500, unless an exclusion applies. Actual liability still depends on valuation and on the recipient’s complete computation for the year.

A genuine gift and a taxable receipt are not mutually exclusive. The anti-abuse purpose of the provision does not create a general exception for affectionate transfers. Equally, genuineness remains relevant to identifying what actually happened: a gift, a loan, shared ownership, reimbursement or some other transaction. The adviser’s first task is accurate characterisation, not the choice of a favourable label.

03Why the definition of “relative” matters

The exclusion covers receipts from a relative. For section 56(2)(x), “relative” takes the meaning in Explanation (e) to section 56(2)(vii). For an individual, that definition covers the spouse, brothers and sisters, brothers and sisters of the spouse and of either parent, lineal ascendants and descendants of the individual and of the spouse, and the spouses of those persons. It is broader than the general definition in section 2(41), which refers only to husband, wife, brother, sister and lineal ascendants or descendants. The relationship between the two definitions is one of the interpretive disputes argued in Karnataka.⁴

The specific definition cannot be replaced wholesale by the shorter general one without accounting for its additional categories. That does not settle what “spouse” means. A list may be exhaustive as to the permitted relationships while leaving the meaning of one listed relationship open to interpretation or constitutional challenge. These are separate questions and should be pleaded separately.

Nor does the text exempt unmarried heterosexual partners. The petitioners’ equality argument is more precise: it concerns the unequal ability to enter a recognised status, and the fiscal disadvantage that follows, rather than an assertion that every heterosexual relationship is automatically exempt. A presumption of marriage arising from long cohabitation is fact-sensitive and should not be presented as an automatic tax qualification.

04Tax equality and marital status: two competing frames

As reported, the petitioners rest their case first on Article 15, arguing that the only difference from a heterosexual couple is the sex of the recipient’s partner, that under-inclusion in a taxing statute is not immune from review, and that marital status can justify a classification only in limited contexts. They rely on State of Gujarat v. Ambica Mills and contend that concerns about tax avoidance cannot justify the exclusion.⁵

The Union characterises the distinction as one of legally recognised marital status. It argues that the Income-tax Act merely refers to a status created by the Hindu Marriage Act, the Special Marriage Act and the other marriage statutes; that a person who lacks that status is aggrieved by the marriage law, not the tax law; that taxing statutes are construed strictly; and that expanding the exempt class is for Parliament. The Court is reported to have observed that widening the statutory definition through interpretation could create uncertainty about which relationships qualify.⁶

Neither frame is complete on its own. The constitutional inquiry cannot end merely by identifying marital status as the basis of classification; it must also consider the object of the exclusion and the consequences of denying access to the status. Conversely, proving a serious disadvantage does not by itself supply a judicially manageable definition of the newly eligible relationship. Duration, exclusivity, evidence and the treatment of other unmarried partners would all require attention. A defensible analysis must address both the equality claim and the mechanics of any remedy.⁷

Genuine commitment explains why the question matters.

05What Supriyo and Navtej do and do not decide

In Supriyo v. Union of India, the Supreme Court declined to read the Special Marriage Act so as to recognise same-sex marriage. The majority, S. Ravindra Bhat J. (for himself and Hima Kohli J.) and P.S. Narasimha J., held that legal recognition of a union akin to marriage, or of a civil union, can come only through enacted law. Those limits matter where interpreting “spouse” would effectively create a legal status. The Court also recorded the Union’s statement that a committee chaired by the Cabinet Secretary would examine the material entitlements of queer couples, such as family pension, gratuity and insurance.⁸

It would be equally imprecise to treat Supriyo as deciding every possible challenge to a tax distinction. The Karnataka petition concerns a particular fiscal provision, and the petitioners say expressly that they are not seeking a right to marry. Whether the relief sought can be separated from the creation of a marital status remains contested. The strength of either position depends on the statutory wording, the prayer and the constitutional analysis, not on invoking marriage equality as shorthand.

Navtej Singh Johar v. Union of India lays an important constitutional foundation on dignity, sexual orientation and equal citizenship. It does not itself insert same-sex partners into the tax definition of “relative”. Decriminalisation, protection against discriminatory treatment and entitlement to a particular fiscal exception must remain analytically distinct.⁹

06The Income-tax Act, 2025 carries the issue forward

For tax years beginning on or after 1 April 2026, the corresponding provisions are section 92(2)(m) (the charge), section 92(3) (the exclusions, including receipts from a relative) and section 92(5)(g) (the definition of “relative”) of the Income-tax Act, 2025. The list still begins with “spouse”. Renumbering does not by itself resolve the status question or create an exemption for unmarried partners.¹⁰

TLC summary of the statutory text. The comparison is of structure, not a substitute for the provisions themselves.

Section 536 of the 2025 Act repeals the 1961 Act but saves earlier rights, liabilities and proceedings; under section 536(2)(c), proceedings for tax years beginning before 1 April 2026 continue under the repealed Act, including proceedings started after that date. A challenge concerning a pre-commencement receipt therefore does not lapse with the repeal. Advisers should identify the date of receipt, the relevant year and the governing provision. Any judgment must also be read for its actual reach: relief under the old provision should not be assumed automatically to settle claims under the new Act.¹¹

07The advice clients need today

Document the transfer, its date, value, ownership history and purpose. Test the actual statutory exclusion before claiming it, and distinguish the receipt from any income later generated by the transferred asset. A receipt excluded as a gift from a spouse may still attract the clubbing provisions; one provision cannot answer the whole wealth-planning exercise.¹²

An anniversary does not become the “occasion of marriage” merely because the couple regards it as a family milestone. A genuine testamentary transfer may fall within the separate exclusion for receipts under a will or by inheritance, but that is not a substitute label for a lifetime gift. Artificial routing, sham loans or unsupported declarations of relationship create further problems rather than curing the statutory one.

08The question the Court must answer

The case deserves attention because family wealth planning increasingly involves relationships that established tax categories do not accommodate. A credible resolution must preserve constitutional scrutiny while providing an administrable rule. Pending that resolution, professional advice should combine accurate reporting, documented facts and carefully framed legal claims. Genuine familial commitment explains why the question matters; it does not permit the adviser to announce an entitlement the law has not yet established.

About the authorSumit KumarFounder, The Lord’s Consultancy · Corporate, Taxation & Regulatory Lawyer

Advises on direct tax, indirect tax and corporate law, and appears before Appellate Tribunals, the High Courts and the Supreme Court.