How to make use of Gift Tax rules in India to save Income tax

gift tax rules to save income tax

Gift Tax as the name says is a tax applicable on Gifts Received. It is the receiver of gift who is liable to pay Gift tax. Even if the gifts are received in Kind, then also the monetary value of gifts to be considered to compute the gift tax.

It is a common practice in families where husband invests in the name of the spouse with the assumption that it helps him in saving taxes on Investment Income, or Grandfather investing in Grandchildren name or family members and friends exchange Shaguns on various occasions like Birthdays, Anniversary or on festivals.

In Income tax terminology, all this is considered to be as Gift unless you give a specific name and justification to it, may be a loan in some instances which should be satisfactory to the Income Tax officer.

As per Wikipedia, the Gift is an Item Given to someone without the expectation of Payment or Return. If there is a reasonable consideration involved either in cash or in Kind then that item may not be considered as gift. As Per Income tax laws it is the receiver whose onus is to explain the source and nature of funds.

There are certain exemptions as per the Gift tax rules where the gifts received from Relatives do not attract any tax. To summarize, any gift of any amount received from Blood Relatives is considered as tax-free in the hands of a receiver.

For NON Relatives the exemption is available only up to Rs 50000, and if the gifts in a year crosses Rs 50000, then the complete amount received will be taxable and added into the total income of the Receiver (Read my detailed article on Gift tax In India)

Thus if Gift tax rules are followed wisely, then one can create different ax files in a family and save considerable taxes.

Through this article, I will explain some of the ways where Gift tax provisions can be used and save tax legitimately.

How to use Gift Tax rules to save Income Tax

  1. Gifting to Children:

Your major Children can help you in considerable tax saving. Till the time they have not started earning their tax file is totally blank and you can fill it up by gifting your money which is meant to put in safe and taxable instruments.

Like say for example the child education fund that you have parked in Bank fixed deposits or may be in debt funds, since it may not be wise to put that money in Equity funds to keep them nontaxable, can be invested in the Child’s name.

This way all the Interest Income and even the capital gains will be accounted for in his/her name and since child does not have any other income of his own, then the advantage of basic tax slab can be taken. The Income up to Rs 2.50 lakh ( as per Income tax rules 2017-18) will be tax free, and over and above Rs 1.5 lakh can be invested in section 80C instruments to save tax.

Even if your child is minor, then also you can take advantage of gift tax rules, at least for that amount which you want to use for child only when he becomes Major. Invest the money in debt mutual fund in the name of child and withdraw it only when child becomes Major. Unlike Interest Income which is accrued and taxed every year, Capital gains gets taxed only when the investments are sold.

Do note that if money is invested in Interest bearing instruments in the name of Minor child then the Interest Income will get clubbed back in the Income of the Parents.

  1. Gifting to Parents

Your Parents if coming under lower tax bracket than you can also be taken help from in helping you save tax by following Gift tax rules.

You may make the taxable investments in their name, so the taxation falls in their tax file.

Like for e.g.you may put the emergency fund money in their bank account or Invest in bank FD or Liquid funds in their name, so as and when you withdraw out of those Investments, there would not be any tax liability in your name. And just like the example of major child, you may enjoy the basic exemption or lower tax rate benefit.

To manage the money in the better way in the both the points above, it’s advisable for you to be a Joint holder in all the Investments. And especially in Parents case, kindly be sure that their estate planning has been done properly to avoid future issues if any.And especially in Parents case, be sure that their estate planning has been done properly to avoid future issues if any.

  1. Gifting to Spouse and daughter In law

As I wrote above that it is a general notion in the families to invest in the name of spouses under impression that the Income out of those investments will be counted as spouse’s income, which actually is wrong.

As per Gift tax rules, though the gift given to spouse or Daughter in laws is tax-free in their hands, if the money gets invested somewhere, then the income from that Investment will be clubbed in the Income of the Giver and taxed as per his/her tax slabs. (Read: Income tax rules on clubbing of Income)

So the first thing is that one should avoid gifting to spouse and daughter in laws, and if at all the gifting is required then the money should either be spent or invested in Tax-free Instruments like Equity or PPF.

From Tax Planning angle if one wants to improve or create the tax file of a spouse, then the wedding gifts can be accounted for in her name. As per Gift tax rules, the gifts received at the time of wedding are tax exempt.

  1. Gifting to HUF

If you Kids are too young, and parents are also in high Income bracket, then do not get disheartened, you can yourself create a Family tax file which is a Joint family account and treated as separate tax entity by Income tax authority. That is known as Hindu Undivided family (HUF).

As per gift tax rules, any gift given by members to HUF is tax-free in the hands of HUF. Since HUF will be a new tax entity so it will enjoy all the exemptions and benefits available to an Individual.

But before working on HUF, please be aware that it would be a family account and once money goes into HUF it will be treated as family money, which cannot be bequeathed by the Karta. However Partition of HUF is possible.  So awareness of rules is important before forming an HUF.

Conclusion:

Gifting between family members if within gift tax rules, can be a good tool to distribute and manage wealth. On one side it may help in some tax saving and on the other, it can be used as a good Estate planning tool too. But you have to be sure that whatever you do should be a genuine transaction and should not look like something to evade taxes.

Gift tax rules if used wisely can help doing legitimate Tax Planning.

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8 COMMENTS

  1. Does it mean that gifts (whether cash/bank or in kind) given to spouse and daughters-in-law is under the “clubbing” provision and therefore the income so generated is “clubbed” with the income of the gift-giver, otherwise in all the cases, the “clubbing” provision is not applicable (of course except in case of minor son/daughter).

    • Kamal Ji, Gifts given to Spouse and Daughter in law does not attract any tax as they both come under Relatives, but the income generated from those gifts will be clubbed with the income of gift giver.

      • That’s exactly what I wrote. My question was “more” about the “clubbing of income” provision rather than on “gift tax” because they all are covered under “relatives” as defined.
        However, one more clarification is requested:
        Except spouse and daughters-in-law, in all cases of “relatives” (as defined where no gift tax is applicable), the “income clubbing provision” is not applicable.
        Means that we can receive gift from any defined relative and the income so generated would not be “clubbed” with the gift-giver. Say, for example, I receive gift my son and I earn any income (whether interest income or any other type of income), my so generated income would not be clubbed with my son’s income.

  2. It is a really interesting article.

    I would also like to mention that generally in weddings you receive gifts from distance relatives or non-relatives. If you are receiving a gift above Rs 50000/- it is better to make a gift deed. The date of gift should be the date of marriage or a near date.

    Also one more point. If you receive any gift above Rs 5000/ (one time or total) form your employer in a Financial year, it is taxable too.

    Am I right Manikaran?

    • Thanks, Madhupam. And yes, a Gift deed for gifts above Rs 50k is a good idea. However, it is not mandatory, but wise for the receiver to maintain records to show the source of funds. A deed can be on a Plain paper, and no franking required.

      And you are correct on the Gift from employer part.

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