Procedure for Gifting
Now that the Gift Tax Act has been abolished, all gifts, made by anyone, NRI or otherwise, through foreign exchange or Indian assets, are free from gift tax. To safeguard against any future hassles, the donee should request the donor for a gift and then the donor should remit the amount to the donee. Alternatively, the donor can offer the gift and the donee may accept the same. In either case, it is necessary for the donee to accept the gift in writing (maybe through a thank you note). Only then it would be considered as a gift in India.
It is better to prepare a gift deed and get it registered (with related stamp duty) but such a precaution is normally needed in the case of high-value gifts, particularly related with real estate.
However, take note of the fact that the Department has a right to inquire into the genuineness of the gift to ensure that it is not a payment made for any hawala or smuggling transaction.
Gift in Contemplation of Death
As per Sec. 191, of the Indian Succession Act, a gift is said to be made in contemplation of death if a person who is ill and expects to die shortly of his illness, delivers to another the possession of any movable property to keep as a gift in case the donor dies of that illness. Such a gift can be revoked by the donor upon recovery.
The main difference is that the normal gifts are irrevocable and can consist of even immovable properties, like residential houses.
Gift from Strangers
There was never any bar on accepting gifts from strangers. A person who is a stranger to you can give a gift to your wife. Surely, he cannot be a stranger to your wife since he should have genuine reasons to give a gift. Likewise, your wife should have a genuine reason to accept the gift.
This principle is laid down in D. C. Rastogi (HUF) v ACIT (Delhi). While underlining the responsibility of the ITOs in this regard the learned judge observed, “it is necessary for the assessee to prove the financial capacity of the donor to make the gifts. In this regard, necessary evidence in the shape of the income of the donor as also his financial status at the time of making the gift would be necessary. The assessee is further required to give full co-operation to the assessing officer in providing complete addresses of the donors so that, if required proper verification is made possible.”
In another landmark case, Rohit Jain v Asst Director, Enforcement Directorate [24TCR382 (ATFFE - New Delhi), the ruling was, “In law, a gift can never be a subject matter of purchase. If consideration is passed from the donee to the donor for making a gift, such a purported gift would be a sham. But if no such consideration is there, a gift otherwise valid does not cease to be so, merely because the donee is a stranger or not related to the donor.”
Yes, gift tax is abolished. But the ITO can certainly exercise his right to examine the genuineness of the gift under a microscope and may construe such gifts, which fail the test, as income in the hands of the donee.
Gifts are Irrevocable
Once you give a gift, there is nothing you can do to take it back.
Someone had given a gift to his wife. A few years later she returned the original amount to him. ITO took the view that the two gifts do not neutralise each other. These will be treated as independent gifts, since gifts once given and accepted, cannot be revoked.
I had come across a very strange case where the clubbing provision was used by one high net-worth individual to spite his rather poor brother with whom he had fallen apart. He invested Rs. 20 lakhs in UTI’s Childrens’ Gift Growth Plan in the name of his brother’s minor child. This is a cumulative scheme and tax is required to be paid on accrual basis. The father of the child could not afford to pay such heavy tax and consulted me.
Fortunately, I had a solution. A gift does not become a gift until the donee accepts it. UTI was informed of the unwillingness of the donee to accept the gift and the problem was solved.
Gift of Jewellery to Wife
Every husband has the right to buy jewellery (or real estate) and gift it to his wife. I do not understand why so many individuals indulge in this bad practice. Do they understand the real concept of ‘Gift’? The gifted amount should be invested in productive assets generating income. The objective should be to make the wife build up her own corpus. Though the income from the corpus gifted to the wife is clubbed in hands of the husband, the income on income is not. This, by itself, is a great boon.
Let me explain. Suppose the husband gifts Rs. 10 lakhs to his wife and she invests the funds in RBs of RBI yielding 6.5% tax-free. She earns Rs. 65,000 annually. This amount is clubbed in the hands of the husband but being tax-free, he does not have to pay any tax thereon. If she invests these Rs. 65,000 in a Co-FD, yielding interest of Rs. 6,500 @ 10% p. a., this interest will not be clubbed in the hands of the husband but will be taxable in her own hands. This being below the tax threshold, she does not have to pay any tax thereon. Nice idea.
All said and done, I do not approve of any gifts to anyone, wife or child, as a tax-saving strategy. Pure-growth, Open-ended, Debt-based schemes of UTI/MFs enable you to save as much tax with gifting as without gifting. And such investment is devoid of the risk of your wife eloping with your best friend or your child doing something worse.
Finally, if you have committed the mistake of giving a gift to your wife and are suffering from the clubbing provision, there is a good method of coming out of the situation. Divorce your wife and merrily continue to stay with her. You may then gift to her any amount without attracting any clubbing provision. Unfortunately you cannot take a divorce from your child. Wait a minute! Someone can adopt it and thereafter, you can give as much gift as you desire, without attracting the clubbing provision. However, take care. The income of the minor child will be clubbed in the hands of the new parent.
How to Avoid Clubbing
1. Gifts made under a will or in contemplation of death do not attract stamp duty.
2. Are you (or your son) intending to get married in the near future? It may be a good idea to give the fiancee or the to be daughter-in-law a handsome gift before the marriage. Even the first stage interest will not get clubbed. Clubbing is applicable only if the relationship of husband and wife or father-in-law and daughter-in-law exists when the gift is made. However, beware! She may run away with the gift and marry someone else.
3. You can contribute up to Rs. 69,500 every year to a PPF account in the name of your minor child. This will be treated as gift but the associated clubbing provision is rendered toothless, since the interest from PPF is tax-free. Contribute only Rs. 500 to your own account to keep it alive. Note that you cannot contribute more than Rs. 70,000 in the aggregate to the accounts of self and minor child of whom you are the guardian.
4. If you have any minor children, you should invest sufficient funds in their names to earn an income of about Rs. 1,500 for each of them. Income up to that level per child is free from income tax.
5. You may gift to your wife (or daughter-in-law) shares of companies, which have announced bonuses. The capital gains on bonus escape clubbing whereas the loss on original holding, if and when sold, arising because of the bonus is welcome for the clubbing.
6. ‘Deep Discount Bonds’ of IDBI/ICICI with a term of over 20 years having withdrawal facilities at regular intervals were also suitable for minors. Circular 2/2002 (F.No. 149/235/2001-TPL) dt. 15.02.2002 negates the benefit by making the income taxable every year. The pure-growth debt based schemes of MFs do not present any such difficulty. Hence, I prefer units of MFs.
7. Savings made by the wife out of the money given for household expenses by her husband is separate property of the wife. Any income arising therefrom cannot be aggregated with the income of the husband.
How not to Avoid Clubbing
1. Some persons carefully choose cumulative schemes like 3-year Co-FDs for a child of over 15 years of age, 7-year debentures for one over 11 years, 6-year NSC-VIII for one over 12 years, etc. They are under a mistaken notion that the cumulative interest received after the child becomes major escapes clubbing. Interest on these schemes, though paid at the end of their term, accrues annually and is brought under the ambit of income tax by Sec. 5.
2. I know a couple that has taken a divorce just to bypass the clubbing provision and is staying happily together!
3. I also know a gang of husbands who give gifts, out of natural love and affection, to someone else’s wife and vice versa. Utmost care is taken to ensure that husband of the donee does not give a gift to donor’s wife. A different wife is selected every year for the favours. Such cross gifts are not permitted by the Act.
Miscellaneous Gifts
1. My in-laws would like to gift two LIC policies - one to me (in service) and another to my wife (housewife having no PAN or filing IT File). What would be the Tax treatment on the maturity value of the policies (maturity after 10/15 years)?
If after, say 3 yrs, I pay the annual premium of the above policies from my income, then -
i) whether I could take rebate u/s 88 for the premium paid.
ii) what would be the tax treatment on the maturity value of the policies?
2. My brother has expressed their desire to gift tax-free Relief Bonds worth Rs. 1 lakh each to me and to my wife.
3. My nephew desires to gift a KVP to me and one to my wife.
What would be the tax treatment at the time of the gift and at their maturity?
I wish I had relatives like those of yours.
1. When a policy is assigned without valuable consideration and the donor continues to pay premiums afterwards, it does not constitute a gift.
I presume it is a policy whose maturity value is tax-free. The maturity proceeds in the hands of your wife and you will be tax-free. I am afraid, there is some confusion in your mind. When the policy is gifted (assigned) to you, it continues to stand in the name of the original policyholder. If he continues to pay the premium, he can claim rebate u/s 88. Not you.
2. The maturity proceeds and/or interest of Relief Bonds will be tax-free in your hands. However, proper procedure will have to be followed. Investors have a choice between two forms of the bonds, viz. ‘Stock Certificate’ or ‘Promissory Note’. Stock Certificate can be transferred only by registering the transfer with RBI. Promissory Note can be transferred by endorsement of holder. Unlike in the case of share transfers, no stamp duty is required. I hope the in-laws have purchased stock certificate. Even otherwise, get the Bonds transferred in your name.
The latest Bonds have deviated from the above structure. The Bonds will be issued in the form of Stock Certificate or may be held at the credit of the holder in an account called Bond Ledger Account (BLA = demat). BLA will be issued and held with the Public Debt Offices of RBI or some authorised branches of the banks and SHCIL. A certificate of holding will be issued to the holder of Bonds in the BLA. Switch over from one form to another is not allowed.
3. KVPs are not transferable from one person to another. These can be transferred only after taking special permission of the post master and only to near relatives, which mean lineal ascendants or descendents or brothers and sisters. The nephew is not a lineal relative.
All said and done, it is better to gift cash than assets to avoid all these ifs and buts.
Wealth Tax Gone
Wealth tax virtually stands abolished in India. Productive assets are free from wealth tax without any limit. Shares, units, commercial buildings, etc., are treated as productive assets. Only the following are considered as ‘assets’ for the purpose of wealth tax, unless these are used for business or profession:
Any building or land appurtenant thereto used as residential, commercial guesthouse or a farm house (situated within 25 kilometres from the local limit of municipality). Even here, one house or part of a house or a plot of land not exceeding 500 square metres, belonging to an individual or an HUF is not included.
Motor cars, yachts, boats and aircrafts.
Jewellery, bullion, furniture, utensils or any other article made wholly or partly of precious metals.
Urban land situated within the jurisdiction of municipality or cantonment board with a population of not less than 10,000 according to the preceding census or within 8 kilometres or such local limits.
The aggregate wealth up to Rs. 15 lakhs is not charged to tax. Amount above this ceiling is charged to tax @ 1% only, irrespective of its size.
Jewellery Valuation
Value of jewellery has to be determined as laid down in Part A of Schedule III, rules 18&19. Return of wealth tax shall be accompanied by a statement of the assessee in Form-O.8A where the value does not exceed Rs. 5 lakhs. Where it exceeds Rs. 5 lakhs a report of a registered valuer in Form-O.8 is also to be attached.
The Department allows the report to be used for 4 subsequent years. All that is needed to be done is to substitute the value of gold, silver or any alloy of the base year with that of the relevant year. Again, adjustments for purchases and sales made during the relevant year will have to be carried out.
Wealth Tax on House under Construction
A house under construction is not a house and therefore, cannot attract the related wealth tax provisions. The installments paid are towards the right to acquire a housing property and not a house itself. This new asset is not treated as a taxable asset by Sec. 2(ea) of the WTA. It becomes eligible to wealth tax only when the property is complete and its ownership passes on to you.
No Wealth Tax on One House
Sec. 5(vi) of the WTA exempts one house or part of a house belonging to an individual or an HUF from wealth tax, irrespective of its value.
The words used are - ‘a house or part of a house’. There is no condition that such a house should be residential or self-occupied. In any case, all the houses used for commercial purpose are exempt. If you own yet another house anywhere in India, one of the houses as chosen by you will be free from wealth tax. Also, any business and commercial premises are productive assets and therefore are free from wealth tax.
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