Before giving a gift, it’s crucial to understand the complex rules of income tax. With the repeal of the Gift Tax Act, the tax liability on gifts now falls on the giver, not the receiver. Under the Income Tax Act, if you receive a gift worth more than ₹50,000 in a financial year, the entire amount will be considered your income and taxable. However, this taxable gift has a clubbing rule that completely changes the relationship between husband and wife and daughter-in-law and father-in-law.
No Tax on Gifts from These Relatives
The biggest relief in the case of gifts is when they are received from a ‘Specified Relative.’ Gifts received in this category are not subject to any income tax limit, meaning they are completely tax-free, regardless of the amount. Relatives eligible for tax-free gifts:
Husband or wife
Parents
Gifts given by parents to their son or daughter-in-law
Gifts given by a son to his parents
Simply put, if a husband gives a gift worth ₹50 lakh to his wife, or a father-in-law gives a gift worth ₹50 lakh to his daughter-in-law, the recipient will not have to pay tax.
The Dangerous Rule of ‘Clubbing’ on Gifts
Although gifts in the above-mentioned relationships are not taxable, there is a ‘clubbing provision’ under the Income Tax Act that changes the tax treatment of income. This means that the gift itself will not be taxable, but the income generated from the gift will be taxable, and this will also be added to the income of the giver.
When does clubbing apply to gift income
If a husband gifts his wife an asset that generates income (such as rent or interest), that income will be added to the husband’s income, not the wife’s, and taxed according to the husband’s tax slab. Similarly, if a father-in-law or mother-in-law gifts property or money to their daughter-in-law, and the gift generates income, such as interest or rent, this income will be added to the income of the father-in-law or mother-in-law, not the daughter-in-law. This clubbing rule applies as long as the relationship exists and applies every year.
Different rules for son-in-laws
Interestingly, the clubbing provision does not apply to gifts given to a son-in-law! This means that if a father-in-law gives a gift to his son-in-law and the gift generates income, that income will be considered the son-in-law’s, not the gift-giving father-in-law’s. The son-in-law will have to pay tax on this according to his tax slab.
Pre-wedding Gifts
If a gift is given to a future wife or future daughter-in-law before marriage, that person does not fall under the category of a ‘specified relative.’ Therefore, if the gift amount exceeds ₹50,000 per year, the entire amount will be considered taxable and added to the recipient’s income. Furthermore, the clubbing provision does not apply to gifts given before marriage.
Gift tax and clubbing provisions are not the same thing. Gift tax determines whether a gift is taxable, while clubbing provisions determine whose income the gift income will be considered. Therefore, if you are considering any financial transactions within your close relationships, it is crucial to understand these complex tax rules.