Part 3 – Tricks to save tax through gifting
Tips to save tax by gifting:
We know that if we are gifting money to spouse minor child or daughter-in-law, income clubbing provisions are applied.
But we should know clubbing provisions will not be applied when the gifted money is invested in any investment option which is tax exempt by default.
For example, rather than a normal FD, if the money is invested in tax-saving options where interest is not taxed, that is those which have Triple E status such as PPF, ELSS etc; and redeemed after maturity then income clubbing provisions won’t apply.
Similarly, you can invest in stocks of a listed company or equity mutual funds and sell them after one year. As they have zero long-term capital gain tax, then also clubbing provisions would not apply.
Income earned from these instruments is tax-free. You can save tax by gifting money to your parents or in-laws because clubbing provisions don’t apply. In these cases, any income generated on the gifts to parents is purely parent’s income and will be taxed in their hands only.
Let us understand this with an example:
Assume that you have Rs. 10 lakhs in your hands which you want to invest and your father and mother both are senior citizens.
You can give Rs. 5 lakhs to each parent and let it get invested in a bank FD (let interest rate 10%).
Now both of them will get Rs. 50,000 as the interest income individually. If after including this Rs. 50,000 their total income in the year is less than the exemption limit which currently is Rs. 3 lakhs they wouldn’t have to pay any tax. This way you have invested Rs. 10 lakhs in parents name with zero income tax on interest income. Nn the other hand if this 10 lakhs was invested in FD on your name and assuming you are into 30 percent bracket you would have paid 30 percent income tax on 1 lakh on interest which is Rs. 30000.
This whole 30,000 is saved when you invested your money in parents name even if your parents are having an additional source of income. It is still beneficial to give the money to them as it would lower the income tax outgo because of the lower tax slab. As your parent tax slab is lesser than yours it is a good option to save tax. You can apply the same logic and invest in property in parents name and let the income come to them and enjoy the tax-free income subject to exemption limits.
In the same way, even the money gifted to major children will not be clubbed in your hand. So in case, you have children who are 18 years or above who are not earning or earning at a lower tax slab. You can gift your surplus money and invest in their name will neither attract give tax nor clubbing of income.This is really a good thing because if you are going to pay for some upcoming children expense such as education goal or marriage.
Instead of investing the money in your name and funding the goal later, you can give the money to the child and invest in their name itself. When the goal arrives the money can be used but for years there will be no or lower tax liability.
You will save a good amount of income tax as you may have seen above that due to clubbing provisions gifting to the spouse is not too beneficial. But what if spouse needs money to finance some investments such as home loan EMI or insurance premium, in that case, it is better to provide loan and not gift on a reasonable rate of interest.
Please do remember that taking and giving of loan transaction between the spouse does not attract the clubbing provisions as in section 64 of income tax act. This is all on the topic gift tax.