Trying to save tax money by gifting our spouse, children or parents is a common trend, especially in India. But every amount that you give away as a gift is not exempted from tax and it is a little more complicated than we think it is.
In a general scenario, we might think that one can gift a certain amount of his health to his relatives who do not have any source of income and assume that only the remaining income will be taxed. But in reality, not only the amount that one gives away as a gift is taxable, the amount the gift money makes if invested is also taxable.
Let us understand with an example.
Suppose Arvind has an income of 10 lakhs per annum and his wife, a homemaker, doesn’t have any source of income. Arvind decides to gift 1 lakh per annum to his wife and asks her to invest that amount in a mutual fund that gets 10% interest per annum. Arvind thinks that he has to pay tax only for his remaining income of 9 lakhs. But when he files his income tax he understands that not only he has to pay tax for his complete 10 lakhs income, but also for the 10% that came from the mutual fund’s interest that his wife had invested. But now he understands that any further profits that 10% interest makes will be non-taxable.
Here are some tricks to save more tax legally by investing in a family members name:
Invest in the tax-exempt or low tax instrument
If you are investing in the name of your spouse or a family member, then make sure you are investing in something which is tax-exempt by default.
Here the profit will be clubbed in your name as tax-free income, and any further investment done with this tax-free income is considered under the head of the donee.
Invest money in the parent’s name
Any amount gifted to your parents or in-laws will be considered as their income and not your income, hence, you can gift your parents and any gain from that investment will be calculated under their head and not under the head of the donee.
Invest in the name of major kids
If you have major kids (kids above the age of 18), then you can gift them an amount and that will be considered as their income and you will be exempt from tax for that money.
This always works the same way as the gifting for the parents work. You can gift a certain amount and that amount is further invested in your children’s name, the earnings that come from that investment will be considered as the income of your children and not yours.
But you have to always keep in mind that gifting your parents or your children is only helpful when they don’t have a taxable income or their tax liability is less than yours.
You can also consider giving interest-free loans to your children as it is lawful and also can help you save a good amount of income tax.
These are some of the ways you can save tax by gifting your near ones. Proper planning and the right execution can save you a lot of money. To know more “Ask Our Experts”.