I fall in the 30% tax slab and I have a good amount lying in fixed deposits. I don’t want to pay 30% tax on the interest. I was wondering…if I transfer/gift that money to my parents (they fall in a lower tax slab)…can that help reduce overall tax for my family?
Hi @Charu_Chaturvedi1 , this seems to be your first post. Welcome to the community!
Tax planning through gifts is a fairly common practice to reduce a family’s overall tax burden.
It basically works by transferring income like interest, rent, dividends, or capital gains to a family member who pays little or no tax.
But before we jump into how it works, let’s get the basics out of the way.
How are gifts taxed in India?
When you transfer assets like cash, shares, gold, property, or even a car, without receiving anything in return, it’s considered a gift. And that gift can either be fully tax-exempt, or come with some tax implications depending on who you give it to and how much it’s worth.
As per the Income Tax Act, if the total value of gifts received during a financial year exceeds ₹50,000, the entire amount becomes taxable in the hands of the recipient.
The recipient must declare this taxable gift under ‘income from other sources’ in their ITR and pay tax as per their applicable slabs.
That said, there are certain exceptions when gifts are not taxable, like:
- Total value of gift received is below ₹50,000
- Gifts received from specified relatives like spouse, parents, children, siblings, etc.
- Gifts received on special occasions like marriage, inheritance, or under a will
You can check this thread to read more about taxation of gifts in India.
Now let’s understand how gifting can help you save taxes.
How does tax planning through gifts actually work?
People often gift money or income-generating assets to family members who fall in a lower tax slab.
That way, any income earned from those gifts gets taxed in the receiver’s hands, at a lower rate (or sometimes not at all).
This works well because:
- The receiver pays tax at a lower rate
- It allows you to split income across family members and maximise use of tax benefits like:
- ₹4 lakh basic exemption limit (₹2.5 lakh under old regime)
- Tax rebate u/s 87A for income up to ₹12L (upto ₹5L under the old regime)
- ₹1.25L long-term capital gains exemption u/s 112A (for shares, equity MF/ETFs)
But keep these 3 conditions in mind:
- The person receiving the gift should fall in a lower tax bracket
- The gift must be tax-exempt in the recipient’s hands
- Clubbing provisions shall not apply
If you gift money or assets to your spouse or minor child, any income they earn from those will still be taxed in your hands, due to clubbing provisions.
So considering all these factors, people typically plan taxes by:
- Gifting to parents
- Gifting to major children (age 18+)
So, answering your question, you can gift the money to your parents. Any interest they earn from putting that amount in a savings account or FD will be considered their income, and taxed at their slab rate. If they have no/little income, it could even be completely tax-free.
Examples of tax planning with gifts
Example 1: Fixed interest deposit
Rahul is in the 30% tax bracket. His father, who’s retired, has annual income under ₹4L. If Rahul opens a fixed deposit in his father’s name (after gifting the money), the interest earned will be taxed as his father’s income. If the total income is below the exemption limit, no tax at all.
Example 2: Saving on capital gains
Let’s say Rahul holds equity mutual funds with ₹2.5L in unrealised long-term capital gains. If he sells them all at once, he’ll be taxed on ₹1.25L (since ₹1.25L is exempt u/s 112A).
But if he gifts half the units to his father, and both of them sell separately, each can claim the ₹1.25L exemption. And hence, zero tax payable on capital gains worth ₹2.5L.
To conclude, if done right, gifting can be a smart way to plan your taxes and retain more of your hard-earned money. Hope this helps!
1 Like