Gift a financial instrument and watch its value grow over the years

Keep in mind that gifts of above Rs 50,000 from non-relatives are taxable in the recipient's hands, except during a wedding

Most people have begun shopping for gifts for their family and friends. Instead of goods, try gifting a financial instrument this year whose value could multiply severalfold over the years. While doing so, however, be mindful that each instrument is governed by a different set of gifting rules and is also taxed differently.

Fixed deposits

You could start a fixed deposit (FD) jointly with the person you wish to gift to. You could also gift the person cash, with which he could start an FD.

How the transfer and the interest generated by the deposit are taxed depends on several factors. Says Adhil Shetty, chief executive officer (CEO), BankBazaar.com, “Receipts from your or your spouse’s immediate relatives are tax exempt. The interest the deposit generates will be taxed according to your tax slab. However, the interest generated by the deposit can sometimes become taxable in your hand under income-clubbing rules.”

For example, if you make a gift to a minor child, and the FD generates interest, that must be clubbed with your income (after an exemption of Rs 1,500).

If the cash is gifted to someone other than a relative, it could be fully taxable or tax-exempt. If the gift is received on an occasion other than marriage, or if the total value of the gifts received by this person in a year exceeds Rs 50,000, the value of all the gifts is fully taxable. Shetty adds, “If the receipts are for their wedding or valued under Rs 50,000, the gift is tax exempt. The interest generated on the FD will be taxed at the recipient’s slab rate.”

Stocks

You can gift a stock by submitting the required forms with your broker. Says Jharna Agarwal, head-products, Anand Rathi Preferred, “Firstly, submit a delivery instruction slip (DIS) mentioning the stock’s details and the recipient’s demat number. Then the recipient should submit a receipt instruction with the same details.” Once matched, the gift transfer is completed.

The transferor is not taxed. Says Gopal Bohra, partner, NA Shah and Associates, “The income earned on such shares will, however, be clubbed if the gift is given to a spouse, daughter-in-law, or minor child.”

The recipient is not liable to pay taxes if the gift is from a relative, which includes spouse, children, parents, brothers, sisters, lineal ascendants and descendants. Adds Bohra: “If the gift is received from a non-relative and the value exceeds Rs 50,000, then it is taxable in the receiver’s hands.”

Life insurance policies

Section 80D of the I-T Act allows a person to buy life insurance for a direct relative. Naval Goel, founder & CEO, PolicyX.com says, “You may buy life insurance for another person provided you have an insurable interest.”

Insurable interest means you should be able to prove that the insured’s death would burden you financially.

Relatives can buy life insurance for each other—spouse and ex-spouse who are divorced, parents can buy for kids and adult kids, grandparents can buy for grandkids, siblings for each other, kids can buy for parents, and one can also buy for business partners.

The person paying for the insurance can take the tax benefit of deduction under Section 80D.  

Mutual funds

Regulations make it difficult to gift mutual funds. Agarwal says, “It can't be done owing to restrictions on payment by a third party.”

The latest rules offer some leeway, however. Says Harshad Chetanwala, co-founder, MyWealthGrowth, “To gift mutual fund units to a minor, transfer the funds to his bank account. You can also transfer money to a joint account of the minor and the guardian. Purchase of units can happen from there.”

Gifts received are prone to litigation, so ensure that you stay on the right side of the law. Says Vivek Jalan, partner, Tax Connect Advisory Services, “Make a gift deed so that the transaction can be substantiated before the tax authorities in future.”

Rules governing gifting of gold

The transferor is not taxed when he gifts gold

Income earned on gifted assets (capital gain) will be clubbed if the gift is given to spouse, daughter-in-law, or a minor child

The recipient is not liable to pay any tax if he receives it from a relative, which includes spouse, children, parents, brothers, sisters, lineal ascendant and descendants

If the gift is received from a non-relative and its value exceeds Rs 50,000, then it is taxable in the recipient's hands

It is advisable to prepare a gift deed

Source: NA Shah and Associates