Tax implications on gifts and how your family can help you save tax

When someone deposits money in your bank account, it is very important to understand the tax implications of this.

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Your parents deposit some money in your account for buying a house. While it’s a help from your
parents, have you ever thought about the tax implication on these kinds of transactions? When someone deposits money in your bank account, it is very important to understand the tax rules and possible issues which can pop up in the future. In this series, I will explain the tax implication and ways to save taxes legally by investing in your family member’s names. Let’s understand this in detail:
By virtue of Section 56(2) any sum of money exceeding Rs 50,000 received without consideration by an individual or an HUF from any person is chargeable to tax, subject to exclusions as follows:
1. Up to Rs 50,000/year is not taxable:
The first major rule which every person should know is that there is no tax to be paid on gifts received (cash or kind), if the amount of the gift is up to Rs 50,000 in a year. However if the total amount crosses Rs 50,000/-. then you will have to pay the tax on the total amount received (not additional). For example – If a friend gifts you Rs 30,000 in a given year, you don’t have to pay any tax on that amount, as its below the limit of Rs 50,000/-.
Now suppose you also get Rs 20,000 after that, still you don’t have to pay the tax as the total worth of the gift you got in the year was Rs 50,000 till now (less than the limit of Rs 50,000/-). But now, if someone gifts you another Rs 10,000/-; your total gift money (it may be in kind also) in a year is Rs 60,000/-, so you will have to pay tax on the total amount of Rs 60,000/- and not just on additional Rs 10,000/-. This Rs 60,000/- will be included in your income and you will have to pay tax on this Rs 60,000/-, as per your tax slab.
2. Any amount received by relatives:
Another rule for taxation on gifts is that any amount received from specified relatives is totally tax-free in the hands of the recipient. So if a relative gives you gift in the form of cash/cheque or in consideration, you will not have to pay any tax on the amount received. Following is a list of relations which are considered as "relatives" for gift transactions:
- Your spouse
- Your brother or sister
- Brother or sister of your spouse
- Brother or sister of either of your parents
- Any of your lineal ascendants or descendants
- Any lineal ascendant or descendant of your spouse
- Spouse of the persons referred to in (2) to (6)
Example – So if you want to buy a house and your father/mother/sister or brother etc. transfer Rs 20 lakh to your bank account, you don’t need to worry about the taxation part, because it’s a gift from your relatives and you will not have to pay any tax on this amount. However, clubbing provisions of income tax would apply on this and you better have some sort of documentary evidence for this kind of transaction. More on this in the next article of this series.
Apart from understanding the above parameters, let us delve deeply and understand in detail, the entire gifting provision of the Income Tax Act and how you can take advantage of it legally by investing and gifting in your family member’s names.
Let’s take an example of a husband who gifts Rs 1 lakh to his wife, who is a homemaker and the wife ultimately invests this money in a Bank Fixed Deposit at the rate of say 10% interest per annum.
This transaction has three parts and the tax implications are as follows:
1.    Tax Implication on Husband for gifting money
2.    Tax Implication on Wife for the money received as a gift
3.    Tax Implication on the income earned out of investment made from the gifted money
Scenario 1: Tax Implication on Husband for gifting money
There is no tax implication on husband for the money he gifted provided it is a legitimate income and the said income had already been offered to tax in his tax computation. But sometimes, people confuse the entire gifting implication and assume that the money which they have gifted to somebody will be reduced from their total taxable income and they have to pay tax only on the balance income. In the above example, the husband is earning say Rs 10,00,000/- per annum and paying taxes on this income, now he may argue that the Rs 1,00,000/- money he had gifted to his wife should be reduced from his total taxable income and he should be paying taxes only on Rs 9,00,000/- i.e. (10,00,000 – 1,00,000). People ask this question many times, but this is simply not allowed!
If it was, everyone would gift all their salary or business income to their wife or parents and no one would pay tax at all, because the entire income would be gifted. The logic behind gift tax is always on the person who receives it. If the government starts taxing people who give gifts, then people will stop gifting. You can gift as much money as you want, but only the income which has already been taxed or the income was tax-free all together, just in case.
This article will be continued in the second part of the series, so stay tuned and keep gifting!
Rishabh Parakh is a Chartered Accountant and the Chief Gardener & Founder Director of Money Plant Consulting. He can be reached at rishabhparakh@moneyplantconsulting.net