In continuation to our ongoing “Tax Implications on Gifts” series, so far we have seen two circumstances. The first one is a case where a person receives a gift and there is tax implication on the same, and the second one as seen in the last article was about a person who is giving that gift and the tax implication thereon.
Let’s understand the second scenario with reference to the example as mentioned in the last article about a wife who had received Rs. 1,00,000 as a gift from her husband. As explained earlier, there would be no tax implication for her ie she is not supposed to pay any tax on this Rs1,00,000 because this is a gift from her husband who comes under the specified list of relatives who are exempt under the Income Tax Act from gift tax liability. Had it been from a person other than the specified ones, then the gift tax rule will apply as explained in the first article.
Now the tricky part comes in. What happens when the gifted money is invested in say FDs or shares? Let’s say that she invests this Rs. 1,00,000 in a bank FD and earns an interest @ 10 per sent annually i.e. Rs.10,000 annually. Who will pay the tax; husband or wife? Ideally, it’s the wife because that is now her money, which she had invested and she needs to pay the tax as per the income tax slab applicable to her. But since she is a housewife, there is no income and the only income is this Rs.10,000, which is way below basic exemption limit under the Income Tax Act i.e. Rs. 2,50,000 (for current AY 2015-16) so, she is not supposed to pay any tax and does not even require to file her returns.
Because of this whole gifting arrangement the income generated on that FD is becoming totally tax-free, which otherwise would have been taxable had the same money been invested in the husband’s name at the first instance. That said, IT officials are aware that people may use these gifting provisions for money laundering and to plug this loophole they have clubbing provisions in place under certain circumstances.
So in the above example, this interest income of Rs.10,000 would not go tax-free and therefore be clubbed in the hands of the husband and would be added to his total income. He has to, thus, pay tax based on his tax slab.
But is there any way out to take advantage of this gifting provision legally? What happens when the wife invests the gifted money in PPF or tax-free bonds or that person had also gifted similar amount of money to his parents and major children other than wife; will the income still be clubbed in his hand out of the investments made by his parents or children? Let’s explore the same in the upcoming article in this series and see the advantage of having a good family! 🙂
Till then enjoy the festivities with your family and stay tuned for more!
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