How to Save Tax by Gifting to your Family

The tax implications you involve when you gift a family member money, and what is the right way you can save tax?

In a scenario, where we have a couple Ashok and Tara, who have been married for three years. Ashok earns annual salary of Rs. 10 lakhs at a respectable job, and Tara is a homemaker. Ashok decides to give his wife a gift of Rs. 1 lakh for whatever she wishes to do. Tara makes an investment in the bank, by starting a fixed deposit which will give her 10% interest per annum. With this investment made, Tara now earns an income of Rs. 10,000.

This transaction between them, will now have 3 different tax implications for the giver, receiver, and income earned from the investment made.

Giver: The husband thinks that by giving his wife the Rs. 1 lakh, his taxable income reduce to Rs. 9 lakhs, on which he will pay taxes. This is not allowed. Ashok, has to pay his taxes on his total income first, and then he can give an amount to his wife or any other family member.

Receiver: The receiver will be exempt from tax on receiving gifts from a list of relations, husband being one of them. Making this transaction completely free of tax for Tara. If Tara had received this amount from any one apart from the list of relations allowed she would be taxed for this amount.

List of relations allowed by the Income Tax is spouse, brother or sister, brother or sister of your spouse, brother or sister of any one of your parents, any lineal ascendants or descendants, spouse’s lineal ascendant or descendant, spouse of the persons mentioned earlier.

Income Earned: The Income Tax Department is smart enough to realize that taxpayer will try to pass of paying their taxes by gifting their spouses who are homemakers, money. Since they don’t have an income they will not require to pay tax, making it tax-free.

Therefore, the Income Tax Department has a process to ensure the both husband and wife’s money are clubbed under one in the Income Clubbing provisions, in which one person will add their income to the other’s income. So you will not save tax again!

Tax Exemptions on Gifting

With the below mentioned ways, you can always enjoy tax exemptions;

Make a Gift to Parents

Taxpayers can transfer their surplus to their parents under a gift deed and invest money in their name. In the case of senior citizens, the tax exemption limit is Rs.3 lakh, whereas super senior citizens who are 80 years of age and above get tax free income of up to Rs.5 lakh.

Senior citizens are exempt from tax on interest income of up to Rs.50,000 generated on deposits made in banks or post offices. Even if your parents' income exceeds the basic exemption ceiling, you will still pay less tax on investments held in their names based on their tax bracket.

Parents who received cash gifts from their child are exempt from tax and income earned from such investment will not be included in your income for taxation. 

Claim House Rent Allowance (HRA)

If you stay with your parents in a house that is owned by your parents, you will be able to claim HRA tax exemption by paying rent to them. If you live in a house owned by your parents, you can claim house rent allowance (HRA) tax exemption by paying them rent.

The condition is that you pay them rent and do not have any ownership interest in the house. With the implementation of Annual Information Statements (AIS), the rent paid by you to your parents will be added on their AIS, which means that providing fraudulent rent receipts will be known by the tax department and will put you on the taxman's radar.

Purchase Health Insurance for Parents

As per Section 80D, you can claim a tax deduction of up to Rs.25,000 on insurance premiums paid towards a health insurance policy purchased for your parents who are below 60 years of age. However, deduction limit for senior citizen parents is Rs.50,000.

The Money you Intend to Gift, Invest in Tax-Exempt Instruments Instead

Investment made in tax-exempt instruments such as ULIPs, ELSS mutual funds, Public Provident Fund, Senior Citizens' Saving Scheme, New Pension Scheme, Pension Plans etc, rather than fixed deposits. With the earnings of these instruments a spouse can invest the earned income anywhere she wants, this will be totally her income and will not be taxed under the clubbing provisions as well.

Make Investments under your Child’s name who is 18 years and above

If you have children who are 18 years or older, then rather than gifting your surplus money to them, investing the same money in their name. The money will not attract any gift tax, or will not even have clubbing of income applied. Any income earned from this investment from the gift given to you major child will be taxed as per their tax brackets, under their name.

There are many ways you can save income tax, by making investments in the name of your family. This is legal and also beneficial not only for you but your family as well.