Gifts give a great joy, it goes without saying. They convey your emotions to the receiver, who in turn, appreciates your sentiments. Gifts enhance relations and strengthen bonds of love. But gifts also serve a practical purpose when it comes to financial planning. You may wish to know. Let me bring to your notice that gifts can serve as a simple albeit very effective tax planning tool.
The provisions of Section 56, relating to tax on gifts, along with the basic exemption limit provisions to make your income is tax-free are applied simultaneously, to ensure tax-free income.
An individual falling in a higher tax bracket, can manage to cut down on the tax liability and increase his or her capital into tax-free income through gifts. This is essentially made possible by tax planners.
The method they follow is to make a person give gifts from post-tax capital to the parents and major children, who mostly are non-taxpayers. To double the benefit, when the recipients of these gifts invest the same, the family can earn more tax-free income.
Of course, there are certain issues, precautions and clarifications that you need to seek from your tax consultant who will address all these aspects so that you are able to put this gainful tax planning strategy through gifting into practice.
In a nutshell, gifts given to your parents and children (above 18) will not invite clubbing provisions. We shall learn about the finer aspects of tax planning and gifting in the subsequent blogs.