Finer aspects of saving tax by gifting to ‘relatives’

Under the Section 56(2)(vi) provisions, certain gifts are tax able as ‘income from other sources’. The provision is applicable for individuals as well as Hindu Undivided Families (HUFs).

If a gift is received by a Trust or A.O.P., it is not taxable as ‘income from other sources’. Check the provisions of the Section for the taxation of gift amount in a given financial year. It is crucial to understand the definition of the term ‘relative’.

A gift received by an individual from one’s spouse, or from one’s sister or brother, or from the spouse’s sister or brother, parents, or from a lineal ascendant/descendant of oneself (or one’s spouse) would be fully tax exempt normally. Also, any gifts of any amount whatsoever received from the spouses of any of these would be completely tax exempt.

Whenever one opts to give or receive any gift from one’s relatives, one must apply the test carefully to determine whether the individual concerned falls within one of the categories of ‘relatives’. If not so, the person would be considered a non-relative and gifts from him or her would be exempt only up to the defined extent in a financial year. It may also be noted that since a HUF cannot have relatives, gifts received by it in excess of the prescribed limit in a financial year would be liable to full taxation.

Some people are under a (false) impression that the act of gifting cash by itself will translate into automatic tax deduction. They are confused over the fact whether gifting would lead to a lower TDS deduction on salary. The reply is NO.

There is no deduction on tax per se for gifting to family. The tax planning strategy should seek to optimize post-tax income, (after having done with tax liabilities). Someone in the highest tax bracket when opts to invest in a FD from money out of one’s post-tax salary, the FD interest gets fully taxable.

However, if one was to gift this amount to one’s parents who invest the same, the interest earned would become tax free. However, this would not directly affect the TDS deduction. Keep in mind the fact that beyond a point, tax-saving through gifting is not possible.

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