Do you know that the amount given as a gift can also be taxed? Yes, if you have gifted money to someone and that amount is earning interest or other income, then that income will be added to your income. This is called the rule of clubbing.
What is the rule of clubbing
According to Section 64 of the Income Tax Act, if the amount given as a gift to someone is invested, then the income from that investment is added to the income of the person giving the gift.
Suppose, you gifted Rs 6 lakh to your wife. Your wife invested this amount in a bank FD, which gave her an interest of Rs 5,000. Now this Rs 5,000 will be added to your income.
Strategies to Minimize Tax Implications While you can’t completely avoid taxes on income generated from gifted assets, you can minimize them by considering the following strategies.
Gift Small Amounts Regularly
Instead of gifting a large sum at once, consider gifting smaller amounts over time.
This can help distribute the income and potentially reduce the overall tax liability.
Gift Assets Directly
Gifting assets like real estate or stocks directly can be more tax-efficient.
The recipient will be responsible for any capital gains tax on the appreciation of these assets.
Utilize Tax-Saving Instruments
Encourage the recipient to invest the gifted money in tax-saving instruments like PPF, ELSS, or NPS. These investments can reduce the overall tax liability.
Consider the Recipient’s Income
If the recipient is in a lower tax bracket, gifting them money can be beneficial as they may pay less tax on the income generated. Some things to keep in mind
Wife’s tax slab
If your wife has a high income and falls in a high tax slab, she will have to pay tax on this income.
Case of housewife
If your wife is a housewife and has no income, she will not have to pay tax on this income.
It is important to understand the rules of gifting. If you want to save tax, you can consider giving an interest-free loan instead of giving a gift.