In the previous posting, we explained to you how gifting can be extremely helpful in tax planning. We now understand the finer aspects of this. People are worried that, the income from the source that contributed to the gifts would get ultimately clubbed in their hands. Some are even concerned about attracting a gift tax.
One should know that gift tax has been terminated since October 1, 1998. There are no worries over attracting any gift tax. Clubbing provisions will come into play in case of gifts to minor children and spouse. Major (above 18) family members (barring spouse) can be gifted any amount of money freely without the donor falling into the clubbing net.
However, there has to be clarity regarding the procedure and whether it is required to make a gift deed on a valid stamp paper. Generally, it is better to make a gift deed and have it registered (with due stamp duty). Such a step is only necessary for making high-value gifts like real estate.
For other ‘tax-free’ gifting transactions, all a donor needs to do is make a gift and the acceptance of the same by the recipient. In simple terms, the donor can make the gift and the recipient should accept it in writing (even a thank you note will do). Once this is done, it be would considered a gift. Preferably, mention the relationship between the recipient and the donor. Both sides concerned should retain this formal document for ready reference if and when needed.
Some people are worried over the fact that making a gift to parents may make it mandatory of the latter to file a return. Well, the purpose of this exercise is that the income from the gift should not lead to any taxable income.
Hence, care should be taken to make sure that the income made from the gifted amount does not take your parents’ income above the taxable level. Ideally, consult an expert to avoid any confusion!