Will money crowdfunded from relatives, friends to pay medical bills be taxed?

My father had to be hospitalized in July 2024 due to a brain stroke; he was in the ICU after surgery for a month, and then once he became stable, we transferred him to a stroke rehabilitation centre, where he was admitted for a further four-and-a-half months. As the combined cost of the surgery, hospital stay and rehab centre stay was high and the insurance was exhausted early, we had to start crowdfunding. We received the following funds: 

1. My mother (non-earning) received ₹5 lakh from my uncle (her elder brother). I received ₹5 lakh from my maternal grandmother and ₹1 lakh from my aunt (wife of my mother’s younger brother). I understand these amounts would be exempted from income tax under Section 56 (2). Is that right?

2. I also received ₹3,55,519 from other people (my friends and mother’s friends, etc.). Would this come under ‘Income from Other Sources’?

All the money was exhausted in the hospital and stroke rehab centre, and currently, we are living from paycheck to paycheck. 
-Navodit Sudhir.

Any amount received without consideration from a relative would not be taxable and is specifically exempt under section 56(2)(x) of the Income Tax Act, 1961. In respect of your mother, amounts received from her brother would be considered as those received from a relative and would, therefore, not be taxable. In your case, the amount received from your maternal grandmother, as well as the wife of your mother’s brother, would also be considered as received from relatives and would therefore not be taxable. 

In respect of the amounts received from your friends and your mother’s friends, these could be considered as taxable in your hands as they are not received from relatives. While one could have taken a view that amount received with a clear condition for spending for a particular purpose should not constitute income in the hands of the receiver, a recent ITAT decision has held that such crowdfunded amount received is taxable in the hands of the recipient under section 56(2)(x). The ITAT decision was primarily based on the fact that there was a mixing of the funds raised from crowdfunding with personal funds, and that the funds were not fully utilised for the purpose for which they were raised. Accordingly, if you have received the funds in a separate bank account, which is then used to incur the hospital and rehabilitation expenditure, or if you can clearly substantiate the link between the funds received and the amounts incurred, you may be able to distinguish your case from the facts in this ITAT case. It may be possible to argue that the funds were received for spending for a specific purpose, were spent for that purpose, and that you were merely a channel for paying the funds on behalf of the contributors. Alternatively, one can also consider claiming a deduction for the hospital expenses incurred out of the amounts received, on the ground that incurring these expenses was the condition for receiving the crowdfunding amounts. 

However, the matter is highly debatable. Therefore, it would be necessary for you to maintain documents to substantiate that the amounts were received with the obligation to spend on hospitalisation and rehabilitation. 

Mahesh Nayak, chartered accountant, CNK & Associates.