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.
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)
How to use Gift Tax rules to save Income Tax
- 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.
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.
- 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.
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, be sure that their estate planning has been done properly to avoid future issues if any.
- Gifting to Spouse and daughter In law
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.
- Gifting to 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.
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.
Gift tax rules if used wisely can help doing legitimate Tax Planning.
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.
Yes. Gifts received from your Major Son, and income generated from it will not be clubbed in the son’s income.
Many many thanks for your clarification.
You are always welcome Kamal Ji
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.
Is parents give money to child who is under fall under tax slab 1??
Yes, if the child is a major then it is tax-free as it is treated as a gift. But, if the child is minor then the income generated from this gift would be clubbed to the father’s income for taxation purposes.
Sir my grandfather has developed property through JDA N gone in section 45(2),so capital asset is converted to stock in trade , so if any gift is to be done of stock in trade to his son n grandson is it possible in blood relative , will income tax come on gift of stock in trade ?, n building is still in underconstruction .
We may not be the right person to answer your query. Please consult a good Chartered Accountant or tax lawyer who may help you with this.