Gifting your family can be taxing in more ways than one

Did you know that a gift given to your relative is tax-free? Same is the case with a marriage gift. Below is a full range of gifts that can spare you from paying taxes.

These gifts are non-taxable

• If they are a marriage gift
• If they are received under a will
• If they are received through inheritance
• If a person gives them in anticipation of their death
• If they are given by a relative*
  *Relatives under Income Tax Act include your and your spouse's family members. However, friends and cousins are not included.

The gift could be anything, ranging from a fixed deposit to jewellery to real estate. (If you want to know more about how to save on tax, you must read this informative piece here).

But before you go bananas because you can save serious money in taxes, let us stop you for another minute or two and inform you how not to goof up on gifting. Yes, apart from dealing with the pressure of gift-giving, it is also important to know 'how to give a gift' to spare yourself the taxman's visit.

Gift may be tax-free, but income derived from it may not
The income earned from a gift is taxable in the hands of the recipient.

But in some cases, it can be taxable in your hands too. You may be liable to paying taxes even if you gift a home, fixed deposits, etc., to your family members.

Below are some scenarios where gifting may come back to bite you hard.

• Gifts given to your child under 18: If you give money to your child to start a fixed deposit, thinking the interest earned will be tax-free because they don't earn any income, you are in for a nasty surprise.
  
  Income of a minor child (unless earned through manual work/application of skill or talent by the child) is clubbed with their parents for tax purposes. In income-tax lingo, this is called 'clubbing of income'.
  
  In other words, income derived by a minor child from gifts received from any source is taxable in the hands of parents.

• Gifts given to your spouse or daughter-in-law: If you transfer any asset to your spouse or daughter-in-law, the income generated from it would be taxable in your hands.
  
  This is applicable if the recipient has either:
  a) not paid for the asset, or
  b) paid an amount for it but not sufficient enough for the taxman.

(You can read the same article mentioned above to understand what constitutes 'sufficient amount' in the eyes of the law).

• Gifting a home: If you transfer any property to your minor child or spouse without paying the 'sufficient amount' for it, you would be treated as the 'deemed owner' of the property.

Pro tip: Clubbing provisions are not applicable on gifts given to a major child or parents.

Suggested read: Is a monetary gift received from parents taxable?