Re: [aaykarbhavan] Clubbing Provisions Attached documents,

As far as I understand , there is no exclusion in clubbing of income if Gift Deed is executed..

Do you have to pay Income Tax on Gifts Received ? Rules and Exemptions !

by Manish Chauhan · 157 comments

Do you know that, when some one deposits some money in your bank account, what is its taxation angle ? A lot of people take some loan from their friends for few months and then return it back, but never think twice about it from taxation angle? Your parents deposit some money to your bank account because you want to pay the down payment of your house. While it's a help from your parents, have you ever thought if you have to pay tax on that amount or not?

In this article lets see all the aspects about these kind of transactions, when money comes and goes out of your bank account and what are the rules for income tax on gifts received from relatives or other people in India .

Let us first see what kind of situations we are talking about ?

• You swiped your credit card for your friend Rs 20,000 purchase and then your friend paid back money to you by transferring it to your bank account.
• You asked Rs 50,000 from your friend as loan and paid him back after 1 month.
• You got Rs 50,000 cheque from your relative on your wedding.
• Your father transferred some money you your bank account as help for some purpose.

These are few instances, which happens in our lives. But its very important for you to understand the tax implications in various scenarios and the possible issues which can come up in the future, if income tax department decides to scrutinize your income tax returns for example. By understanding the gift tax rules and precautions to take, you will be safe. So now, let's look at 5 points which will help you understand rules about incomes tax on gifts in a better way.

By virtue of Section 56(2), any sum of money exceeding Rs. 50000 received without consideration by an individual or an HUF from any person is chargeable to tax as income under "other sources" subject to some exclusions . Below we are going to see all those exclusions and gift tax rules.

1. Upto Rs 50,000/year is not taxable

The first major rule which every person should know is that there is no tax to be paid on gifts received (cash or kind), if the amount of the gift is upto Rs 50,000 in a year. However if the total amount crosses Rs 50,000 . Then you will have to pay the tax on the total amount recieved (not additional). For example – If a friend of yours gifts you Rs 30,000 in a given year, you don't have to pay any tax on that amount, as its below the limit of Rs 50,000 .

Now suppose you also get Rs 20,000 after that, still you don't have to pay the tax as the total worth of the gift you got in the year was Rs 50,000 till now (less than the limit of Rs 50,000) . But now, if someone gifts you another Rs 10,000 . Your total gifts in a year is Rs 60,000, so you will have to pay tax on the total amount of Rs 60,000 , not just on additional Rs 10,000 . This Rs 60,000 will be included in your income and you will have to pay tax on this Rs 60,000, as per your tax slab. Note that this is exactly how the written law is.

Since 1/10/2009, Section 56(2) has been amended and the scope of ''gifts'' will include even immovable properties or any other property besides sums of money under its ambit.

2. Any amount received by relatives is not taxable at all

Another rule for income tax on gifts, is that any amount received from specified relatives is totally tax free in the hands of recipient. So if a relative gives you gift in form of cash/cheque or in consideration, you will not have to pay any tax on the amount received.

Following is the list of relations which are considered as "relatives" for this

• Your spouse
• Your brother or sister
• Brother or sister of your spouse
• Brother or sister of either of your parents
• Any of your lineal ascendants or descendants
• Any lineal ascendant or descendant of your spouse
• Spouse of the persons referred  in above points

Example – So if you want to buy a house and your father/mother/sister/brother etc transfer Rs 20 lacs to your bank account. You don't need to worry about the taxation part, because its a gift from your relatives and you will not have to pay any tax on this amount. However its a good practice to do the documentation for this, if the amount if pretty big like in this example. All you need to do is document this transaction on a paper which clearly states that who transferred the money and the reason for it, along with the signatures of both parties. In future, if there is any income tax scrutiny, this small piece of proof will be handy and will help you a lot.

Important – Note that, there is no income tax to be paid on the money received from relatives, however at times income clubbing provisions may apply, for example, if a husband gifts Rs 10,00,000 to wife, there is no ta to be paid by wife on Rs 10 lacs received, however when she invests that money and if any interest income is generated, it will be clubbed with husband income. Read all about income tax clubbing rules  here.

3. Any amount received as Wedding Gift is not taxable

One of the few advantages of getting married is that any amount you get, as wedding gift is not taxable in your hands, either from relative or non-relative . So even if you get Rs 1 crore as wedding gift from someone in your wedding, it's not taxable in your hands.

Lets see some examples -

Suppose if your spouse parents give you some gift worth Rs 10 lacs on marriage, it will be treated as a wedding gift and will not be taxed. However, it is not clear by provision, whether the gifts should have been on the exact date of marriage, or a few days before or later. Normally, it should be sufficient if the gift is given just on the occasion of the marriage, means either on the day of the marriage itself or a day or two before or after. Practical common sense view would prevail in such cases.

4. Gift Tax on Movable/ Immovable properties

There is a valuation aspect involved in gifting of immovable properties

• If the property is gifted without any consideration then if the stamp duty value exceeds Rs. 50000/-, stamp duty value will be taken
• If the property is gifted for a consideration, then the actual value of the property will be taken

In case of other properties:

• If gifted without consideration and fair market value exceeds 50,000, then the fair market value will be taken as the final value
• If gifted for a consideration and the Fair Market Value (FMV) less consideration is greater than 50000, then the FMV less consideration amount will be taken as the value of the gift.

5. No tax on the amount received through WILL or Inheritance

When any sum of money or any property is received under a will or by way of inheritance, it is totally exempt from Gift Tax. So if you get a real estate worth Rs 50,00,000 and some other things worth Rs 30,00,000 through inheritance , you will not have to pay any tax on that amount received.

Be cautious about the take and give transactions

At times, we ask for money from our friends for some purpose and then give it back. One of the examples I can give is what I heard from one of the readers in comments section. He swiped his credit card for a friend for Rs 50,000 and then asked his friend to pay him back through online banking. Here if you see, the amount came to his account, however it was a reverse transaction and not actually a gift, so ideally this transaction should not be considered at all.

If its a small amount and can be justified with proofs, there is not much to worry about this. But in this case, lets say there is a income tax scrutiny, and tax inspector asks you about this "Rs 50,000″ coming to your account. Now – You can clearly say that the money you got from your  friend was a amount which you got back because you paid Rs 50,000 to him through your credit card. But just saying this will not be enough, He will ask you to prove it. Then you will have to bring your credit card statement, and prove to him that this was done by you for your friend and no one else.

The point here is – no matters how truthful you are, there should be something you can show to income tax officers in case this is questioned. So for any transaction like this, which involves a big amount, its always a good idea to have a proof, like in the example I just gave, the credit card statement will be handy along with a small note, where you friend signs saying that you swiped your credit card for him and he will pay back the money through netbanking.

In this same case, If you cant prove that this money was just a "reverse entry" , you can imagine the situation. Even if you were clean, the whole amount would be added to your income and you need to pay income tax based on your tax slabs on the ground of unaccounted income.

Another point, worth nothing is that just because you have a reverse transaction, the other party can get into trouble. For example, suppose you give Rs 20 lacs to your friend, who wanted the money for buying a house and then your friend gives back those Rs 20 lacs in 3 months. Note that now there is a clear entry that you gave your friend Rs 20 lacs, so in future income tax department can reach you through your friend and ask you about this Rs 20 lacs and from where you got so much of money. They can ask you to justify the source of this money. So always keep these points in your mind.

How to document Gift transactions, Registered Deed or plain paper?

A gift deed is a deed, that is executed and delivered in which the donor transfers title to the receiver without any payment or considerations. It a document which transfer the legal title of the property to the donor, where the consideration is not monetary but is made in return for love and affection. There is indistinctness with respect to compliance of the gift deed at times, Whether a gift deed is required to be made in every circumstance

When it is required to be stamped OR get registered?

Gift made by way of cash or cheque does not mandatory requires to be executed through a gift deed. Writing a plain typed note on a paper will generally suffice. It is not required to be stamped and registration is also not needed. You may simply mention the names of persons, their relation and that the gift is being given out of love and affection.

Gift made by way of movable property is required to be made in stamp paper and stamped by the notary or court, and registration of gift deed is not required in this case. For the purpose of making a gift of immovable property, the transfer must be effected by a registered instrument signed by or on behalf of the donor. Gift of immovable property which is not registered is not valid as per law and cannot pass any title to the receiver.

Conclusion on Income Tax on Gifts received

As far as you make the transactions which can be justified, there is not much to worry, however its always a good and safe practice to document things on a paper with proper signatures. This will help you because income tax scrutiny can go back to many years of your life. The stronger your documentation and proof, the smoother will the situation be.

Thanks to Rishabh Parakh (www.rishabhparakh.com), a chartered accountant who helped me while this post and gave his inputs. He is founder  director of Money Plant Consulting (www.moneyplantconsulting.net ) a leading Tax & Investment Advisory service provider in Pune.

Clubbing of spousal and children income can cost you more tax

May 27, 2013, 04.22PM IST

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(As per the Income tax Act,…)

By Shalini Jain

Sharing is caring! When a husband gifts some fixed deposits to his wife, little does he know when those fixed deposits earn interest, not only will his wife earn the interest and spend it on herself, he will be the one paying taxes on such interest income earned by her. That would be the day when he understands the concept of clubbing of income. So sharing is caring, but not when it comes to the Indian Income tax Act, 1961. As per the Income tax Act, 1961 (the Act), a person is taxed not only in respect of his own income but sometimes also on income which he feels does not belong to him.

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Many a times, taxpayers make an attempt to reduce their tax liability by transferring the assets to others while enjoying the benefits of the income arising from those assets themselves. To eliminate such a practice, clubbing provisions are there in the Act.

If the spouse receives any income by way of salary, commission, fees or any other form of remuneration whether in cash or in kind from a concern in which the individual has a substantial interest (substantial interest means the individual or his relatives have 20% or more ownership of shares carrying voting powers in case of a company or 20% or more share in profits in case the concern is not a company), such income will be taxed in the hands of the individual whose total income is greater, provided that the remuneration has not been received by the spouse from the application of technical or professional knowledge or experience. For example, if in a company Rahul has a substantial interest, then the salary earned by his wife who is employed in the same company without any technical or professional qualifications, will be taxable in the hands of Rahul.

Further, if an asset is transferred by an individual to the spouse directly or indirectly, the income derived from such asset will be taxable in the hands of the individual provided that the asset is transferred without adequate consideration or is not in connection with an agreement to live apart. For example, if Kunal transfers fixed deposits to his wife without adequate consideration or not as a consequence of divorce, interest earned on the fixed deposits will be included in the income of Kunal.

The clubbing provisions also extend to son's wife. If an asset is transferred by an individual to the son's wife directly or indirectly, the income derived from such asset is taxable in the hands of the individual provided that the asset is transferred without adequate consideration.

If an asset is transferred by an individual to any person or association of persons directly or indirectly, then the income derived immediately or for the deferred benefit of spouse/son's wife from such asset will be taxable in the hands of the individual, provided that the asset is transferred without adequate consideration.
In case an income is earned by a child before attainment of 18 years of age, such income of minor child will be included in the income of the parent whose taxable income, excluding the said income is greater. However, if the parents of the minor child are separated, then the minor child's income will be included in the income of the parent who is maintaining the child. In case of inclusion of income earned by a minor child in the parent's income, an exemption of Rs. 1,500/- per child per annum or income earned by child, whichever is lower shall be available to the parent.

However, there is some relief available - the income of the minor child shall not be clubbed with income of the individual if the minor child is suffering from any specified disability (such as cerebral palsy, autism etc) or the income of a minor child is derived on account of manual work or the income of a minor child is due to any activity involving his / her skill, talent or specialised knowledge and experience.

So when you watch the latest movie 'Gippi', be assured that that the income of the child artist Riya Vij shall not be clubbed with her parents since she derives the income using her own acting skills and talent.

(The writer is Associate Director - Tax & Regulatory services, Ernst & Young. Views expressed are personal.)

We all love receiving Gifts. Certain gifts received from our relatives are tax free. Gifts can be used as effective tax planning tools.

Detail provision on Gifts and their taxation is discussed below:

 

1. What is the current law on gifts tax? Priti Mittal, Jaipur

Any gift received in cash or kind exceeding Rs.50,000 or purchase of movable or immovable property for inadequate payment is taxed in the hands of recipient as "income from other sources."

2. My Father has gifted Rs 100,000/- ? Do I have to pay tax? Sonia Agarwal, Hyderabad
Gifts received from specified relatives are exempt from Income Tax, and there is no upper limit also.

Father is included in the definition of relative, therefore amount received from him would be tax free.

3. Who is a relative in the eyes of the law? Prashant Gupta, Faridabad

A relative can be any of the following:

1. Spouse of the individual
2. Brother or sister of the individual, spouse or of either parent
3. Lineal ascendants or descendants of individual or of spouse
4. Spouse of person referred to in scenario 2 and 3 above

4. What are other conditions for receiving Tax-free Gifts? Surbhi Ghosh, Gurgaon

If you receive a gift on any of the following occasions, that gift will be tax free in your hands.

• On occasion of the marriage of the individual
• Under a will or by way of inheritance
• In contemplation of death of the payer
• Any local authority, trust or university etc.

5. What else do I keep in mind when I Receive Gifts? Vineet Sehgal, Delhi

While receiving a gift, its always in the interest of the donee (i.e., the recipient) to get a gift deed signed by the donor. This can always help support the case that the item was indeed a gift and can be used as evidence in case of future litigation/investigation by the Income tax department.

6. Can I gift Rs 1,50,000/- to my Husband or wife? Puneet, Noida

Yes you can gift to your husband or wife.

But, Please be careful that if your spouse invest this money and any gain like interest, Rent etc is received it would be clubbed with your income.

7. I have received Rs 45,000/- From my friend ? Is it taxable? Rakesh Sinha, Bangalore

No, since this is below, Rs 50, 000, it is not taxable.

However, if in the same tax year, you receive another gift of Rs 5,001. Now the total value of gifts received by you is Rs 50,001, and beyond the tax free limit.

Now the entire amount will be taxed as "income from other sources" in your hands.

8. Gift to Fiance is it taxable? S. Shanker, Hyderbad

If you have given gold necklace worth Rs 1,00,000 to your fiance. This entire amount is taxable in her hands, as jewellery (moveable property) above Rs 50,000 is taxable in the hands of the recipient.

In this case she is still not your wife, but only fiance, so the gift is taxable.

If you were married, and would have given the gift then no incidence of tax would have arisen.

9. What all are considered moveable and immoveable property? Prasenjit, Kolkata

The following are specifically defined as moveable or immoveable property:

• Land or buildings
• Shares and securities
• Jewellery
• Archeological collection
• Drawings
• Paintings
• Sculptures
• Any works of art

10. I have received Rs 1,00,000/- from my Father in law? Is it Taxable? Kamal Das, Noida

Since Father in law falls under definition of relative it is not taxable. But please make sure that amount he is giving to you , has been declared by him in his Income Tax Return

11. I want to Gift a House to my daughter in law. Is it taxable? Mohit Vaidya, Gurgaon

Daughter in law, falls under the definition of relative. Hence it is not taxable.

But, Please be careful that if your daughter in law gets House rent from this property and it would be clubbed with your income.

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From: Rakesh Baid <rakesh_baid@yahoo.com>
To: "aaykarbhavan@yahoogroups.com" <aaykarbhavan@yahoogroups.com>
Cc: "djshah1944@yahoo.com" <djshah1944@yahoo.com>; CA RANJEET <ranjeet.airan@gmail.com>; Ranjitji Google Group <echange-professionally@googlegroups.com>
Sent: Thursday, 1 August 2013 3:15 AM
Subject: [aaykarbhavan] Clubbing Provisions

 

One of our client want to Gift Rs. 10 lac to his wife. Spouse will in turn will be investing the same in equity shares and advancing the loans to companies in which she has more than 20% holding. She will be receiving interest at market rate.

Gift will be given by executing proper gift deeds.

Would like to know the whether clubbing provision will be applicable on duly executed gift transactions.

Would also like to know whether clubbing provision will be applicable if gift is given by adult children to parents or vice versa.

Thanks in advance

Regards

Rakesh Kr Baid

9433002201

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