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Gift money to your MAJOR Child – Save Tax

By   /   December 30, 2012  /   10 Comments


gift money save tax

 

 

Financial dependency of children on parents in India is generally up to completion of graduation. (This assumption is applicable for financial well off families).

Parents can get some relief from Income Tax as soon as their child becomes MAJOR i.e. 18 yr’s  by gifting a lump sum amount to their child. Let’s C HOW;

If parents deposit money or make a Fixed Deposit or invest in any interest bearing instrument in the name of MINOR child, interest credited will be taxable in the hands of the parents. This is known as Clubbing of income.

In case the child is MAJOR, clubbing of income provision will not take place & interest will be taxable in the hands of Major son/daughter.

Here is a CATCH ; Since income up to Rs. 2,00,000 p.a. is not taxable in the hands of an individual, Major child need not to pay tax on interest amount up to Rs. 2,00,000.

An example will help you better understand the whole scene:

Parent Name: Mr. Suresh

Age: 50 yr’s

Occupation: Bank Manager

Salary: Rs. 60,000 p.m.

Child name: Rahul

Age: 18 (Major)

Education Qualification: 1st yr of Engineering

Monthly expenses ( other than tuition fee, can be pocket money or other regular expenses ): Rs. 10,000 p.m.

Now, to meet out Rahul regular expenses, Mr. Suresh has two OPTIONS :
Option 1: Mr. Suresh pays for monthly expenses of his child from his salary income.

Option 2: Now this is Interesting. Mr Suresh has fixed deposit of Rs. 20 lac with bank @ 8.5% pa.  Interest per annum comes out to be Rs. 1,70,000

From his monthly salary it’s clear that he comes in 20% tax bracket. Tax on interest amount from fixed deposit comes out to be 1,70,000*.2 =  Rs. 34,000.

Mr. Suresh needs to GIFT Rs. 14,20,000 out of Rs. 20,00,000 to his MAJOR child to meet his regular expenses of Rs. 1,20,000. Interest of Rs. 1,20,000 on FD worth Rs. 14,20,000 will not be taxable to his child as it is below the exemption limit of Rs. 2,00,000.

Thus tax saved by Mr. Suresh : 1,20,000*.2 = 24,000.

Happy Investing

 

www.financialkundali.com

www.financialkundali.com

 

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About the author

Hi My name is Hari Om Tripathi. I am an engineer by chance & a Personal Financial Planner by choice. Currently residing in Kanpur & writing full time for Financial Kundali. In case you have any query about Personal Financial Planning such a buying a MF or ULIP, going for a life insurance plan or a term plan, to surrender your policy or not or any other questions related to your Personal Financial Planning, write to me at financialkundali@gmail.com

10 Comments

  1. Puneet nath says:

    Good one

  2. Komal Gupta says:

    Hi, can my husband gift me 10 lacs and i can deposit it in bank fd & earn interest. In this way he will reduce his tax liability. Since i am not earning, i will not have to pay any tax.

    • Your husband can gift you as much as he wants 🙂 . In case you deposit that money in bank FD & income in the form of interest will be generated out of that. This income will be taxable in hands of your husband 🙁

  3. Manas says:

    Do i need to prepare a gift deed in case i am gifting money to my child.

    • It’s always better to have things on paper. Do mention on a plane paper that you are gifting Rs. x to you child. Do mention the details of the transaction along with date & signature of your child & your sig. That’s enough 🙂

  4. samrat says:

    Do i need to pay gift tax in case i gift money to my minor child or major child.

    • You need not to pay any gift tax. In case you gift the money to your minor son, interest on that amount will be treated as your income & you will have to pay tax on that amount whereas in case of major son, interest income will be treated as his own income.

  5. Your style is unique compared to other people I have read stuff from. I appreciate you for posting when you have the opportunity, Guess I will just book mark this blog.

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