We always have a question regarding Gift Tax or tax treatment of gifts received by an individual or HUF.
We have divided this topic (Gift Tax) into three parts as below:
- Part 1 – Features of gift tax rules
- Part 2 – Tax implication of various parties involved in gifting process and income clubbing provisions
- Part 3 – Tricks to save tax through gifting
Part 1 – Features of gift tax rules:
If someone deposits some money in your bank account it implies taxation.
For examples below are the few instances which happen in our daily lives but it is very important for us to understand the tax implications:
- If you asked Rs. 60,000 as a loan from your friend and paid him back after one month.
- You got Rs. 30,000 in your bank account from your spouse when you are travelling
- third situation could be you swipe your credit card for your friend Rs. 50,000 for purchase and then your friend paid back money to you by transferring it to your bank account
- fourth situation could be your father transferred Rs, 70,000 in your bank account for your upcoming home loan EMI
In various scenarios including the above, it is possible in future if income tax department decides to scrutinize our income tax returns.
So now let’s look at points which will help us understand rules about income tax on gifts in a better way.
The first major rule which we should know is that there is no tax to be paid on gifts received in the amount of the gift is up to Rs. 50,000 a year.
Gifts here means gifts received as cash, kind or property without consideration. Without consideration means there is no consideration to pay it back.
Now if the total amount crosses Rs. 50,000 then you will have to pay the tax on the total amount received not the additional.
Let us understand this with an example:
Let say, in the current financial year a friend gives you a gift or rupees 20,000 and other friend gives you a gift or Rs. 25,000 then you will not have to pay any tax as the total is less than Rs. 50,000.
Now, if suppose friends C gives you Rs. 50,000 more in the same financial year then your total gifts in a year is now Rs. 60,000, now you will have to pay tax on the total amount of Rs. 60,000 not just on the additional 10,000 above 50,000. This whole Rs. 60,000 will be included in your income and you will have to pay tax on this Rs. 60,000 as per your existing tax slab.
Any amount received as a gift from specified relatives is totally tax-free in the hands of the recipient.
As per Income Tax Act, any amount received from specified relatives is totally tax-free in the hands of recipient. So if a relative gives you a gift in the form of cash, cheque or any other kind, you will not have to pay any tax on the amount received.
One of the few advantages of getting married is that any amount you get as a wedding gift is not taxable in your hands either from a relative or non-relative.
Please note: There is no maximum limit on the value of gift received but these transactions in many instances attract income clubbing provisions.
Part 2 – Tax implication of various parties involved in gifting process and income clubbing provisions
Many of us in India try to save income tax by investing the money in spouse, children and parents name.
Let’s understand the tax implications so various people involved when a gift is given and what is the right way to save tax by gifting money.
Suppose a husband whose income is Rs. 12 lakh per annum and gives rupees 1 lakh to his wife who is a homemaker. Now his wife invests that money in Bank FD which is giving an interest rate of 10% per annum. So she earns rupees 10,000 after a year on her investment of rupees 1 lakh.
Tax implication in the above example will be as below:
Giver: In this case “Husband”
The person who gives the gift cannot claim any income tax deduction or exemption from his or her income.
The income of the wife, arising from the money or physical asset transferred by the husband as gift is clubbed with the income of the husband. Clubbing will also be applicable if the assets or the money are routed by the husband through any other person for the immediate or deferred benefit of the wife.
The same rule will apply to minor child or daughter-in-law as well.
So, in this case, the husband has to pay tax on Rs. 12 Lakhs (after getting deduction under section 80C) plus FD interest of Rs. 10,000 earned by his wife on the gifted Rs. 1 lakh.
Receiver: In this case “Wife”
No tax on Rs. 1 lakh as she got this amount as a gift from her husband who comes under the specified list of relatives who are exempt under the Income Tax Act from gift tax liability.
Note: If she would have got this 1 lakh from her friend or others who are unrelated to her. In that case, this one lakh would have been considered her income for the year and taxed in her hands.
The above clubbing provision will not apply in the case like the minor child is doing some manual work or using his skill or talent to get that gift. Similarly when a gift is actually a salary received by the spouse on the application of technical or professional knowledge.
Important point: Any further income generated from the income of the gift received is not clubbed further. That will be hundred percent income of the person who is the receiver of the gift.
So in the example above, if wife further invests this Rs. 10,000 in bank FD at the same interest rate and earns Rs. 1,000 as an income. This time it will be completely wife’s income and not husband so no clubbing of income will apply.
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.