Usually, people express their love and fondness through gifts. We all love to receive the gifts. We celebrate various festivals attend marriage ceremonies and giving or receiving gifts is the inherent part of it. However, most people are not aware of the tax implication on gifts. They are not aware of the fact that gifts may land them into tax implications. We frequently hear that cars and homes are being gifted, especially during the marriages. But we are not aware of the fact that these gifts are taxable after a certain limit.
What is the tax-free limit on gifts?
Earlier the term ‘gift’ was defined in The Gift Tax Act, 1958 but it was repealed by the Finance Act, 1998. In 2004 gift tax was revived and put under the income tax regime. According to the income tax Act, 1961 if the value of received gift is more than 50 thousand a year, then the excess amount is liable to be taxed and treated as an income of the receiver. However, this rule has the certain limitation and in the case of relatives the gift tax is not applicable. Just to avoid gift tax in India you cannot term anybody as your relatives by calling that he or she is son or daughter of my paternal uncle’s neighbour’s sister. To check such tax avoidance practices, the income tax department has notified in the income tax rules that from whom you can receive the tax-free gifts. As per income tax rule, these relatives are
3. You and your spouse brothers and sister
4. Brothers and sisters of your parents
5. Your lineal descendants
6. Lineal descendants of your spouse
7. In case of Hindu Undivided Family (HUF) any member of the family
Also, the gifts received from relatives other than above mentioned during the marriage is exempted from being taxed by the income tax department. For instance, if you receive a flat as a gift from your distant relatives during the marriage then you needn’t worry about the questions of income tax department. Do one thing; just ensure that the date mentioned in the gift deed is your marriage date. Any other date which is near to your marriage will also work. This is the same as the property received from inheritance where you would not have to pay property tax but you are obliged to pay income tax on the later income generated from the property. There is no need to include the amount you got from any educational institute or local authorities on the basis of merit or because of your good deeds. Point to be noted that if the amount received is more than 50 thousand and received on occasion other than the above mentioned then you are liable to pay tax on the entire amount. For instance, if you received 70 thousand from your friend because you helped his wife during her pregnancy then you are liable to include the full amount of 70 thousand as your income, not just 20 thousand.
Format of Gift Deed
If you are gifting someone then it is important to back it with gift deeds. A gift deed has the force of law and this is the legal document which empowers you to give someone without any consideration. A gift deed should have the following head mentioned
1. Details of who executed the gift deed
2. Details of person in whose favour gift deed is executed
3. Date with the place where gift deed is executed
4. Relationship between receiver and donor
5. Signature with date of receiver and giver
6. The presence of two witnesses is a must. Details of these witnesses must be given in the gift deed
7. Signatures of the witnesses
8. Details of the property which is gifted along with the market value
Some Legal Way to Save Tax by Gifting Money
Here we understand the tax implications on the gift and some legal ways to save taxes by gifting money to family members. Let us understand how these thing occurs.
What is clubbing of income?
Clubbing of income can be defined as the income of some other person included in the income of an assessee. The included income is called deemed income based on the various provision of income tax Act, 1961 mentioned under the section 60 to section 64. The main idea behind introducing the clubbing of income is to generate maximum possible tax from the assessee. And no income is able to escape tax while moving any asset or income to the third party, including the family members.
Clubbing of the wife’s income
We know that if you gift money to your wife and if she invests the gifted money and earns interest from those investments then the entire income would be clubbed in the income of husband and he is liable to pay tax on the income generated. Please note that income earned from the income earned is not clubbed in the husband income. We will explain the whole scenario with the example. See how this whole thing works.
For instance, you have gifted Rs. 10 lakh to your wife and she has invested the said money and earned an interest of Rs. 1 lakh then the entire 1 lakh will be clubbed with your income for the computation of tax. However, if she further reinvests the earned interest of Rs. 1 lakh and earns Rs. 10 thousand as interest, then the earned interest will be considered her own income and will not be clubbed with your income for the computation of tax. There is one more interesting scenario where this clubbing provision will not apply and that is if the investment made by your wife is in buying the share of any listed company. Let us suppose your wife has purchased the share of Rs. 10 lakh in any listed company and later on after 24 months she sold that share and makes the profit of Rs. 2 lakh then not a single penny is added to your income for the computation of tax. That money will be clubbed in the name of your wife and she is liable to pay tax on it if any.
The point should be noted that earlier rule of income earned from the income earned is not clubbed would be also applicable and if your wife further reinvests the money and make a profit on it then the profit will not be clubbed in your name she is only liable to pay tax on it if any.
Investment made in the name of parents
One more way to save tax is to gift or giving loans to your parents as well as in-laws because clubbing provision does not apply in this case. The gifted or loaned money will be taxed in their hands only, if any, as per the applicable tax slab on them. We will explain this complex provision with an example. Let us see how this work
For instance, you have gifted Rs. 15 lakh to your mother and father who are senior citizens and they invest this money. They invested the money in fixed deposits and earned an interest of Rs. 2.5 lakh individually. If they are retired and does not have any other source of income then entire earned amount is tax-free as this is below the basic exemption limit. This situation is winning- win for you. On one hand you helped them and on the other hand, you have enjoyed the benefit of tax exemption and possibly the lower tax slab rates also. You can also use the money to buy the property on their name and put it on rent which again becomes a source of tax-free income if the total money received as a rent is below the basic exemption limit.
Investment made in the name of children
Similar to the provision of gifting money to parents, money gifted to your children and then further invested in their name will not be clubbed in your income provided they have attained the age of majority. In case you have children who attained the age of majority and studying or earning at lower tax slab rate than you. Then gift your extra money to them or make an investment in their name to avoid gift tax or clubbing. Income earned on the investment made will be counted as your child’s income and taxed, if any, on their end only. You can also opt for other provisions like giving an interest-free loan to your children as it helps you to save some more taxes. However, if you have minor children then clubbing provision will apply, except in the case when the income is earned by the children because of his skill or talent.
Special gifts and income tax exemptions
Some of the gifts are fully exempted from income tax irrespective of the fact whether they are received in cash or any other form. Here we are providing list of such special gifts.
1. Gift received under the will or through inheritance. You need not pay a single penny as a tax on the gift received through will or inheritance but you are required to pay taxes on further income generated from the source.
2. Gift received because of the death of the donor.
3. Gift received from any local authority because of your good deeds.
4. Gift received from any fund or university or foundation, trust, educational institution or hospital or any institution referred under the section 10 (23C).
5. Gift received from any institution or trust which is registered under the section 12AA of Income-tax Act, 1961 as public charitable trust.
Why was gift tax abolished and then restored?
The original gift tax was abolished by the Financial Act, 1998. It was abolished to provide the tax relief to middle-class taxpayers who receives and give gifts. But when gift tax act was abolished a lot of people, particularly big business owners started to misuse this system to launder black money and accumulate properties in the name of non-relatives. In order to stop malpractices finance ministry decided to incorporate a gift tax system under the section 56 (2) of Income Tax Act, 1961.
What are the things that qualify as a gift under income tax law?
The original gift tax act has classified certain categories of the item as a gift and the same is used by the new tax rule for gifts and continue to utilise this for identifying taxable and non-taxable monetary receipts and transferred assets.
Things which are under the definition of gifts:
1. Movable property including securities, archaeological collection, jewellery, bullion, antiques, vehicles, works of art, paintings and sculptures.
2. Cash or cheque receipt also comes under the definition of gifts.
3. Immovable property includes flat, house, land and buildings.
Gift payment made by NRIs
1. When an NRI parent, child or relative as per specified by the income tax rule transfers cash or nay property as a gift, then it is not taxable in the hands of resident receipt.
2. Gift of immovable property abroad is not taxable by the income tax department.
3. A gift made to parents from NRE accounts of children are tax- free income.
Some points must be remembered by donor
1. The donor is not required to pay tax on money gifted to someone else.
2. You cannot deduct the value of gifted money from your income.
3. Income earned from your gift by your unemployed spouse or daughter-in-law is clubbed with your income.
4. Income earned on the earned income is not taxable in your hand. The earned income is taxable in the hand of receiver alone.
How to get benefits legally on gift tax exemption
1. There is one more interesting scenario where this clubbing provision will not apply and if the investment made by your wife in buying the share of any listed company. Suppose your wife has purchased the share of Rs. 20 lakh in any listed company and after 24 months she sold that share and makes the profit of Rs. 3 lakh then not a single penny is added to your income for the computation of tax. That money will be clubbed in the name of your wife and she is liable to pay tax on it if any.
2. Similar to the same provision of gifting money to parents, money gifted to your children and then further invested in their name will not be clubbed in your income provided that they have attained the age of majority.
3. One more way to save tax is to gift or give loans to your parents as well as in-laws because clubbing provision does not apply in this case. The gifted or loaned money will be taxed in their hands only, if any, as per the applicable tax slab. This is more beneficial when their income lies below the threshold limit prescribed by the income tax department.