Gifting to wife and son: How tax rules and clubbing provisions apply

Tax rules for gifts

Gifting to family members is a common way to transfer wealth, but the tax treatment can vary depending on who the recipient is and how the gift money is used.

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I want to gift Rs 10 lakh to my wife and son. I know it's tax-free. Further, if they earn interest on this or invest in mutual funds, then the profit belongs to them. I trust it is correct?

Expert Advice: In case the aggregate of all gifts received by a person during the year exceeds Rs 50,000, the entire value of the gift becomes taxable in the recipient’s hands. However, gifts from specified relatives are exempt from this rule. Spouse and children fall under the definition of specified relatives, so gifts you give to your wife and son will not be treated as their income. Since donor-based gift tax was abolished long ago, you also have no tax liability on the gifts you make.

The taxation of income from investing the gifted money works differently. For income earned by your wife, it will be clubbed with your own income under Section 64 of the Income Tax Act. This clubbing applies only to income arising directly from the gift, not to returns from reinvestment of already clubbed income.

For your son, the rule depends on his age. If he is a major, there is no clubbing, and the income will be taxed in his hands. If he is a minor, income from such gifts — along with all other passive income — will be clubbed with the income of the parent who earns more, regardless of who made the gift. Once the minor’s income is clubbed with one parent, it will continue to be so in subsequent years unless the Income Tax Officer directs otherwise. In case of legal separation, the income is clubbed with the parent who maintains the minor child.

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