It always feels nice to get gifts from dear ones. But have you ever thought that giving gifts to them can be equally gratifying?

Yes, it can be as you save that extra bit on taxes by showering gifts on your family members and relatives.

In this year’s Union budget, the basic exemption limit on personal income has been raised to Rs 2,25,000 for people above 65 years, Rs 1,80,000 for women and Rs 1,50,000 for men and Hindu Undivided Family (HUF).

A family can reduce its tax liability on an income of nearly Rs 20 lakh to nil by proper tax planning through gifts and loans.

Let us illustrate this with the example of Ramen Roy’s family that consists of his parents (senior citizens), his wife, son Ratul and daughter Rama, both unmarried. If each of them has a personal source of income and maintains separate tax files (does not necessarily have to be a taxpayer), each will be eligible for the basic exemption limit according to the category. Thus, the total income eligible for exemption is Rs 11,10,000.

If the family is an HUF, it will be eligible for a basic exemption of Rs 1,50,000. Thus, the family won’t have to pay any tax on an annual income of Rs 12,60,000.

Collective duty

Let us consider the Rs 1-lakh tax relief that one can claim under section 80C of the income tax act in the form of deductions towards tax saving investments. Each member of Ramen’s household along with the family itself can claim a total deduction of Rs 7 lakh under section 80C.

This means Ramen Roy’s family having a total annual income of Rs 19,60,000 won’t have to pay any income tax. This is besides deductions available under section 80D (medical insurance) and section 24 (interest payment on housing loans).

Be generous

If taxpayers in the family transfer part of their income either through gifts or loans to as many relatives as possible, they can considerably reduce their tax burden.

The income from gifts/loans will be taxed in the accounts of donees who have so far been non-taxpayers. Tax on such income would thus be nil or much lower than the taxpaying members.

In this way, the net tax liability on the income of the family will get significantly reduced.

Points to ponder

However, one must remember a few points while giving gifts.

An important consideration is the provision for clubbing of income under section 64 of the income tax act.

Though the gift tax has been abolished, a few clauses were inserted in 2004 under which a cash gift of less than Rs 50,000 from a non-relative will be tax free. But if the amount is more than Rs 50,000, the entire amount will be counted as income and will be taxed. However, gifts in kind don’t attract any tax.

Gifts from lineal descendants or ascendants are tax free, irrespective of the amount. But if a person gifts cash to his/her daughter-in-law or wife or minor children, the income from such gifts will be clubbed with the income of the donor for tax purposes.

Wiser options

It would be wise to give a loan instead of a gift to the daughter-in-law and wife. The loan should not be given interest-free and one must charge an interest that can be at a discount to the market rate.

The wife or the daughter-in-law can invest the money in business, buying shares or mutual funds or jewellery.

Any income from such investments will be considered as personal income of the recipient of the loan and won’t be clubbed with the donor’s income.

In the case of a minor, one can buy a life insurance, open a PPF account on his/her behalf or gift units of mutual funds or shares.

These gifts are not to be redeemed till the child is 18 years of age. The advantages of opening a life insurance or a PPF account is that the income from these instruments are exempted under section 10 of the income tax act.

The benefit of mutual fund units or equities is that long-term capital gains tax on these is nil.

Even the dividend income from diversified equity schemes of mutual funds is tax-free. These incomes are also not included while calculating the total income for tax purposes.

Child’s play

Children, even when they turn major, in the family can help save tax. One is free to gift generously to one’s children so that the income, if any, arising from these investments will be taxed in their hands and not the donor’s.

For example, if one has fixed deposits of Rs 10 lakh and is paying income tax at the highest rate of 30 per cent, one will have to pay a tax of Rs 28,483.50 on the annual interest income of Rs 93,083.32 (assumed at 9 per cent interest rate accumulated quarterly) on the fixed deposit.

But if one gifts Rs 5 lakh each to his son and daughter, each of them will earn an annual interest of Rs 46,541.66 for which they don’t have to pay any income tax because the interest income is much lower than the basic exemption limit for each.