Do you know about Gift Tax?

Have you gifted money in relative’s bank account?

Although I am not much expert in tax matters but I can give you fair idea on this issue. In general, many tax payer gift to their relatives like parents, spouse and children to save the tax. It is not so simple as the people understand. Many people just transfer the money into their relative or friend’s account and assume that it will help them to save tax because they have gifted away that money and because their relative come under tax exemption limit income so they don’t have to pay any tax.

So today we will understand the tax implication if you transfer some amount to your relatives account. What is the tax implication on involving each party in this transaction? Let us assume you transfer Rs 2 lakh to your wife’s bank account and your income is Rs 15 lakh per annum. Your wife invests this Rs 2 lakh in a bank fix deposit at the rate of 9% and earn Rs 18,000 interest income in a financial year. There are 3 types of tax liability arise in this case.

Tax liability on husband or donor for the amount gifted:

In this case, husband can never claim any type of tax deduction or exemption on that gifted amount (Rs 2 lakh). You have to pay tax on your entire income Rs 15 lakh after deducting eligible available exemption or deduction section 80C etc. After paying tax, he can gift any amount to any relative.

Tax liability on wife or receiver for the amount received:

In this case the wife has no tax liability because she has received the gifted amount from her husband, who comes under specified list of relatives. She can receive any amount from these types of specified list of relatives and still will not be any tax liability. If she receive gifted amount from any other individuals that amount would be taxable on her hand.

Tax liability on income earned from invested gifted money:

In this case wife has earned interest income Rs 18,000 by investing gifted amount Re 2 lakh in bank FD. Although the interest income comes in wife’s account but in this case she has no tax liability and the same interest income clubbed with husband’s income and her husband pay the tax on her interest income.

The interesting point is that if she further invests this interest income Rs 18,000 in bank FD again and earns income on invested amount then she will be liable to pay tax on the interest income earned by investing Rs 18,000 in bank FD.

If you gift the money your parents name and major child then the income earned on that gifted amount will not be clubbed in your taxable income. There are lots of ways to save income tax by restructuring investments in relative’s names. In general, people do not have much time to plan all this and for years they pay higher income tax and never optimize it. You should consult from a good CA for these types of tax saving strategy.

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Warm regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com