The salaried class of the country had lot of expectations in reducing their tax liability when BJP led government presented its first budget for the financial year 2015-16. Unfortunately their expectations failed miserably as the finance minister not only left the personal taxation rates untouched but also increased the service tax rates from the existing 12.36 per cent to 14 per cent.
It dismayed the salaried class as it resulted in emptying the pockets further. However, if government has not extended any relief, everything is not lost and as usual, a taxpayer’s family can help to share the burden, including the tax burden. This will provide much needed help in reducing the overall tax of the taxpayer. This requires only an understanding of Gift tax provisions by the taxpayer.
Section 56(2) of the Income tax Act 1961 outlines the provisions of receiving property or sum of money received without consideration, known as gifts. It mentions the following category of relatives from whom the gifts received is fully tax exempted. In other words if any of the following relative gives you gift in the form of cash or cheque, one need not pay any tax on the amount received.
- spouse of an individual i.e. husband/wife
- brother or sister of an individual
- brother or sister of spouse of individual(i.e. wife’s brother/sister or husband’s brother/sister)
- brother or sister of either of the parents of the individual(i.e. father’s brother or sister, mother’s brother or sister)
- any lineal ascendant of the individual (i.e. parents, grandparents, great- grand parents and so on.)
- any lineal descendant of the individual (i.e. children, grand children….)
- any lineal ascendant or descendant of the spouse of individual (i.e. parents, grandparents, great grandparents of spouse….)
- spouse of the persons from 2 to 7 above
However, in case of a spouse (and daughter in law), one need to be cautious enough as section 64 of the income tax Act allows clubbing of income . Any income given to the spouse will be clubbed back in the hands of the donor of the amount. Nonetheless, any income earned thereon will not be clubbed, as mentioned above, in the subsequent years.
A smart taxpayer then can either save tax by gifting money to spouse and that amount is invested in tax free instruments such as PPF under section 80C.In a genuine case it may happen that money is gifted to a spouse’s brother or sister and then paid back via gift deed itself of a considerable amount. In such a case, a proper documentation of gift deed should be prepared to prove genuineness of the transaction.
Minor children( below the age of 18 years), are of not much use to save income tax. Any income earned on investment made in name of minor children is clubbed in the hands of parent whosoever having made such investment. Certain type of investment made in minor child name yet can offer tax relief to the parent. The tax payer may take a smarter turn here. One may give an interest free loan to one’s spouse.
A proper documentation for this is essential again. Let the spouse use that money till the child turns 18 years. After the child attains the status of major, the loan amount may be returned back and then the said amount may be gifted to the child. The major child therefore is certainly a tax – saver for the taxpayer. The major child can be gifted at least to such an extent in that the entire exemption limit as well as investment under section 80C is fully exhausted.
Like children, parents and parents-in-law can further support the taxpayer. In most cases, the elderly people do not have any major source of income, except the lucky few who receive pension. Therefore, most of the taxpayers’ parents either do not fall in the category of taxpayer or fall in the lowest tax bracket. Involve them and ensure they do not feel any crunch of money. Gift them, or give loan, so that they can invest that amount according to their wish, for example in fixed deposits.
Allow them to be family head again, let them restart taking care of family expenditure. It needs to be remembered that older generation people usually spend money quite judiciously in comparison to the present younger generation. This way, the money is then not only in safe hands but any such investment by them would also yield higher return benefitting from many schemes specially meant for senior citizens.
Just not only this, the taxpayer can further benefit while investing money in tax free instruments in the name of their parents. Also, income accrued to parents does not attract clubbing of income provisions. If parents can bring in such substantial benefits, it is the responsibility of the tax payer to take proper medical care of their parents. The premium amount paid on their medical insurance allows a deduction of Rs 30000 which further brings down income tax burden. Parents, as usual, are therefore assets to the family.
Not the least, if the taxpayer is going to marry, his fiancée, a would -be family member can also help in saving income tax. Any monetary gift to her and any income generated thereon would not be clubbed to the donor’s income. The extent of gift amount may be considered keeping in mind her tax bracket. This way, the burden of tax gets reduced and each of them gets a reason to be more happy, one by paying lesser amount of tax, and the other by receiving money in the account.
Nonetheless, the idea of discussing the above is not to promote tax evasion in any sense but to spread awareness of the existing provisions amount the masses about making use of Gift in order to save income tax legally.
Sharad Ranjan is a faculty in Economics with Zakir Husain Post Graduate Evening College, University of Delhi. Sharad has a Ph.D in Economics, Masters in Economics & a M.Phil in Applied Economics, he has 20 years of rich experience in the areas of academics, research, training and student relations ...
