Women have more often than not been looked at as people farthest from finances and anything associated with savings, investments, banks etc. While that may not hold true across classes and regions, it is still the larger truth. We thus get to you this series on personal finance, making it easier for women to be in charge of their money.
Here’s the first of the fortnightly columns:
Diwali, the festival of lights and prosperity, and for most also the annual gifting season, is less than a week away. This Diwali, we tell you how to gift your family while also welcoming Goddess Lakshmi by saving tax. First, let’s understand the tax liabilities on various members of a family when they receive gifts in the form of cash.
Let’s consider the case of a husband drawing an annual income of Rs 20 lakh gifting Rs 5 lakh to his wife. In all probability, the wife will invest the amount in a fixed deposit (FD) offering 7 per cent interest per annum on which she will earn Rs 35,000 interest.
While filing his taxes, the husband will have to pay tax on his gross annual income (Rs 20 lakh) as the Rs 5 lakh won’t be exempted from tax calculation. The wife will not have to pay any tax on the interest earned from the FD as the husband comes under the list of specified relatives who are exempted from the income tax under the rule of gift tax liability. So who will pay the tax on interest earned from the FD? The husband. As per Income Clubbing Provisions, since the wife does not have any other income, the liability of paying tax on the interest generated falls on the gift donor (husband) who will have to pay tax in accordance with his tax slab.
In the above example, if the wife invests the money received from husband in tax-saving instruments, then the Income Clubbing Provisions will not apply to the husband. So if wife invests the money in an equity-linked savings scheme (ELSS) mutual fund with a lock-in period of three years or buys shares of listed companies and sells it after a year, the husband will not have to pay any tax as the income earned from the tax-saving instruments or equities will be termed long-term capital gains which is exempted from tax. The wife can then invest the interest earned in whichever instrument she chooses as it will now be considered her income.
Income Clubbing Provisions are not applicable when gifting money to one’s parents or in-laws. As per Income Tax Law, the income generated on money gifted to parents will be considered parents’ income and taxed as per their respective tax slabs.
A senior citizen above 60 years and less than 80 years is exempted from tax upto Rs 3 lakh. So, one can gift up to Rs 42 lakh each to her/his mother and father which they can invest in FDs at 7 per cent interest rate. The income earned will be Rs 2.94 lakh and assuming your parents have no other source of income, the entire interest earned is tax free for them. If you had invested Rs 42 lakh in an FD in your name, then you’d have ended up paying tax of Rs 88,200 in accordance with the 30 per cent income tax slab.
So, you can give up to Rs 84 lakh to your parents as gift and save tax of Rs 1,76,400. If your parents are above 80 years of age, then tax exemption limit is Rs 5 lakh. In that case, you can gift Rs 70 lakh each to your parents and save tax of Rs 2.94 lakh on the interest earned. One can also invest in property in a parent’s name and let the rent income be received by them as they are entitled to tax exemption as per their age.
One can gift money to children who are not minors (above 18 years of age), are studying, or whose income attracts a low tax rate. The rationale remains the same as income earned on investment will be taxed in the child’s name who may not have any other source of income while they are studying. One can also give interest-free loan to parents and children and avail of more tax benefits.
So this Diwali, plan your gifts from a tax-saving perspective and enjoy the festivities and the sweets. Happy investing!
- The figures mentioned here are for understanding purpose only.