In my last article on tax implication on gifts, I have explained what happens if you give a gift to someone or receive one; either in cash or kind and under which circumstances you need to pay taxes on them. Apart from that there is another important factor to be considered. Is the income you earn out of the investments made using the gifted money taxable? If yes then who is supposed to bear those taxes, you or the person who gifted the money? Let’s understand in detail.
Let’s take an example of a husband who gifts Rs. 1 lakh to his wife, who is a homemaker. She invests this money in a Bank FD at the rate of say 10% interest per annum.
This transaction has three parts and the tax implications 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 the husband for the money he gifted provided it is a legitimate income and has already been taxed in his tax computation. However people often get confused assuming 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. He may argue that the Rs. 1,00,000 that 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).
This might sound strange, but a lot of people often ask this question. This is simply not allowed because then everyone will gift their entire salary or business income to their wives or parents and no one will pay tax at all.
So in the above example, the husband has to pay tax on his income of Rs. 10,00,000 subjected to all the benefits as available to him under various sections of the IT act. Let’s assume that his total tax after all deductions comes to Rs. 75,000. So his post tax income is Rs. 9,25,000 which he can now gift to anyone as it his duly taxed income.
But what happens in the hands of the recipient of this gift, in this case his wife? What are the tax implications for her on the money received as a gift? Is she supposed to pay taxes based on the income she has made out of that money? I will discuss this scenario in detail in the third part of this article. Till then enjoy the festivity and keep gifting.
Image courtesy: © Thinkstockphotos/ Getty images
More On >> Money
