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Tax Laws related to Gifts


Tax Laws related to Gifts Gifts can mean taxes for the receiver as well as the giver .Iif you know laws related to gifts given or received you can avoid taxes or minimize their impact.








I. Some gifts do not attract any taxes for the receiver. These gifts include
  • Gifts from a relative. Relatives include
    • Spouse of the individual;
    • Brother or sister of the individual;
    • Brother or sister of the spouse of the individual;
    • Brother or sister of either of the parents of the individual;
    • Any lineal ascendant or descendant of an individual;
    • Any lineal ascendant/descendant of spouse of the individual
  • Gifts received the occasion of the marriage of the individual, or
  • Gifts received under a will or by way of inheritance,
  • Gifts received in contemplation of death of the payer.
    •  
    The Problem of Clubbing of Income Although the gift itself is tax free, in some cases it could attract clubbing of income. Income and wealth from gifts given to minor children, the spouse or daughter-in-law will continue to be deemed income and wealth of the transferor. For Example if you invest in fixed deposit in the name of your minor child, the interest from the FD will be added to your total income and taxed accordingly.  
    Some points to remember -
    -Income from gift given to minor is clubbed with the income of the spouse who is earning the higher income. He/she however gets an exemption on taxes up to Rs. 1,500 in respect of each minor child u/s 10(32). All the income of physically or mentally handicapped minor child will be directly assessed in the hands of the child. A minor earning income by way of manual work or an activity involving application of his skill, talent or specialized knowledge and experience, is directly assessed in the hands of the child. However the income arising from his investments will suffer clubbing. 
    -In the case of spouse or daughter-in-law, income on income is not clubbed unless it crosses the minimum threshold of Rs. 50,000. In other words, instead of investing in your own name, and pay tax thereon, it is better to give a gift, pay tax on the original corpus gifted (you would anyways pay taxes on the income had it been invested in your name) and keep on building a corpus for your spouse.
II. When Gifts received will be taxed

Any individual who receives gifts from non-relatives whether in cash or kind for a value of over Rs.50000 will have the value of such gifts added to his income and taxed accordingly. The gifts received by a son-in-law from his parent-in-law also fall in this category.

Conclusion

Firstly gifting to minors is absolutely avoidable as it doesn't give any real tax benefit as the whole income is clubbed with that of parents. Secondly you can gift a non earning spouse; funds for investments in equity which if kept for the long term will be tax-free. Since income on income is not taxable for gifts to spouse, you could look at locking in gains from equity into fixed deposits without any clubbing implication. Thirdly it will be a much better idea to gift assets to close relatives through Will. This of course doesn't include gifts in cash that is meant for immediate expenses of the receiver like education or medical care. It refers to financial and real assets for which you can plan taxes by investing in tax efficient/tax saving instruments. This way your family will enjoy a larger inheritance and need not share its benefits with the government.

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