Many of us are indulgent gift givers and the festival season is a good time to express our love for our near and dear ones. It seems trivial that gifts may attract income tax. But if you are planning a large gift to your family or business contacts, there may be a tax implication. Hence, however benign your intentions may be about the gift, you must work your way around taxes too.
Who should pay tax on gift?
When a gift is exchanged, if at all it is taxed, the receiver must pay it. There is no tax implication for the giver. One is free to receive gifts up to ₹50,000 in a year. But if the total value of the gifts exceed ₹50,000, the entire value is included in the receiver’s income and taxed. Say, your fiancé gifted you a watch worth ₹15,000; your friend gifted you ₹20,000 and you took money as a gift from a colleague for ₹30,000. You’ll have to include the full ₹65,000 in your income and pay tax on it.
Gifts from family
As such, gifts from your family are not taxable for you. To keep things clear, relations which are included within the ambit of ‘family’ have been defined by the Income Tax Department. Your parents, spouse, siblings, in-laws, any of your lineal ascendants and descendants are included.
But can family members freely gift each other property or assets without worrying about taxes? The answer is no. The tax department has added rules that allow the asset or income from an asset to continue to be included with the giver’s income, even though a transfer has taken place. This is because taxpayers sometimes misuse gifts as a means to circumvent taxes by transferring an asset or passing on an income.
Tax planning
Firstly, if you are planning to gift a property or fixed deposits or cash, make sure the gift is properly documented and its source can be explained. Secondly, use safe relations. This is because of clubbing provisions. As per clubbing rules, incomes may continue to be taxed in your hands even though you’ve gifted them.
Gifts to parents: Gifts to parents are fully exempt from tax for them (as well as for you). Any income from the gift shall not be clubbed with your income.
Let’s say you gifted them a property which earns rent, or a fixed deposit which earns interest; these incomes will be taxed in their hands and not added to your income. This is because clubbing rules are not applicable on gifts to parents.
Gifts to children who are adults (more than 18 years old): Similarly, you can gift any sum of money or assets to your adult children. These gifts are exempt in their hands, and any income earned from them is not taxed as your income. Do remember though, your children will have to file a tax return and pay tax on this income. This can work well, if their total income is within ₹2.5 lakh (minimum income exempt from tax). So, if you gift them a fixed deposit of, say, ₹10 lakh, it’s possible that its interest income is fully tax-free for them.
Gifts to spouse: It is normal for gift exchange to take place between couples. But when these transfers are made to the non-earning spouse, the department can sometimes question them. Where transfers are more of a tax-saving arrangement, clubbing provisions may apply. Say, if you are parking your funds in your spouse’s name, and interest is earned in his/her account, such income may be clubbed with your income.
Gifts to business contacts: Are you planning to give your business contacts expensive gifts? These gifts may be taxed in their hands. Some professionals who receive gifts of high value have to disclose them in their tax returns and pay tax on them. The department may also not allow you to claim the cost of these gifts in your business return. Extra caution must be exercised in this regard.
(The writer is Chief Editor, ClearTax.com)