Can gifting assets to family members lead to tax efficiency?

For instance, if assets are gifted to a spouse, any income generated from those assets will be clubbed with the income of the person who originally owned the asset. In the case of a minor child, any income generated from those assets will be clubbed with the income of the highest-earning family member.

Any income of a minor child, unless it is actively earned by the child, is liable to clubbing provision. Such provisions are aimed at curbing tax avoidance through asset transfers to other family members.

Let’s break down the rules and exemptions around income clubbing.

Transfers to relatives

The clubbing provisions primarily apply to transfers made to a spouse or minor children. Gifting assets to other relations, such as parents, in-laws, or major children, does not trigger these rules. Gifts to these relatives are also tax-exempt, wherein the person receiving the gift is not liable to pay taxes.

“Gifts don’t trigger any tax liability for the receiver, as long as gifts are made to specified relatives,” says Prakash Hegde, Bengaluru-based chartered accountant.

Assets such as property, stocks, mutual funds, bonds, etc. can be gifted to the parents, in-laws or major children and income from such assets don’t fall under the clubbing provisions. Income such as interest income, rental income, dividend income, will not be clubbed with the income of the taxpayer making the transfer in such cases.

Funding fixed deposits of parents, in-laws, or a major child does not trigger clubbing provision. “Instead of paying directly to your parents for their maintenance, the parents can use the interest income from such bank fixed deposits for the same,” pointed out Nitesh Buddhadev, Mumbai-based chartered accountant and founder of Nimit Consultancy.

“For gift of immovable property, a duly registered gift deed is mandatory. For the gift of any other asset such as gold, cash, etc., a gift deed may be created and registered, especially if it is a high-value item,” said Siddharth Deb, director-tax at EY India.

Also Read: How you can claim deductions and save on taxes from rental income

Loans

Loans to spouse for a genuine reason will not trigger clubbing of income. It is advisable there is an appropriate interest rate charged to the spouse and the transaction is verifiable in case it comes under scrutiny.

Further income

While straight asset transfer via gift to your spouse will trigger clubbing provision, such a transfer may turn out to be tax-efficient in certain scenarios.

Let’s say a husband gifts a property to his non-working wife. The rental income from such a property – let’s say ₹50,000 – gets clubbed with the income of the husband. However, further income generated by investing such a rental income will not be taxable in the husband’s hands, but in the wife’s hands. If that rental income is invested in a bank fixed deposit, interest income will be taxed in the hands of the wife.

“Income on income already clubbed and invested is not subjected to clubbing provision again. On the other hand, when the transferred asset is converted into any other form, clubbing will continue to be applicable,” explained Balwant Jain, Mumbai-based tax and investment expert.

Complex clubbing

While further income is exempt from clubbing, there can be a layer of complexity in calculating what should be clubbed and what should not.

“When there is churning of investments, it becomes a tricky and lengthy process. The gifted funds need to be traced, and incomes thereon need to be clubbed,” said Bhavya Gandhi, chartered accountant at Rashmin Sanghvi & Associates.

“There is another layer of complexity when gift is of ‘assets’ instead of funds. The computation of capital gains on sale of gifted assets should consider the cost of acquisition as the cost at which the donor had purchased the asset. Further, the value of the asset as on date of gift should be considered as the principal gift value, which has to be used to trace and calculate the portion of income to be clubbed in the hands of donor,” Gandhi added.

Also Read: How to move your mutual fund units from one demat to another or gift them

Transfer risks

Asset transfers such as gifting involve the transferring of absolute ownership. The gift receiver gets full ownership of the asset once transferred. If he or she decides not to transfer back the asset to the original owner, there is likely to be little legal remedy for it.

“We had a case where the son transferred his property to his father, to reduce his wealth tax liability, which was applicable till 2015. However, the father suddenly passed away and then the ownership of the property was disputed by other family-members,” says Hegde.

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