Nifty99000 100%

Sensex99000 100%

Article rating: No rating
Article rating: No rating
Article rating: 5.0
Article rating: 5.0
Article rating: 5.0
Article rating: 5.0
Article rating: 5.0
Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: 4.0
Article rating: 5.0
Article rating: 3.3
Article rating: 5.0
RSS

News

Has Gift Tax Been Abolished? Look Again

Author: AN Shanbhag Sandeep Shanbhag/Wednesday, November 14, 2018/Categories: Tax, Expert View

Has Gift Tax Been Abolished? Look Again

A number of tax laws in India were abolished as the cost of collection did not justify the benefit of amount collected. Estate duty, introduced in 1953, was abolished in 1985, gift tax, introduced in 1958, was abolished in 1998, and wealth tax was abolished in 2016. We strongly feel that income tax should also be abolished as the cost of collection of income tax, not only to the revenue department but also to the taxpayer, inclusive of the cost of the various litigations in courts, is higher than the revenue collected.  

However, there is a catch. Although these taxes were abolished in pen and paper, they have been modified and included in Income Tax forms. Yes, wealth tax was abolished but the Income Tax Return forms were modified to capture the information relating to the relevant assets. Consequently, we will have to give this detail even when the total value of these assets is less than Rs 30 lakh.

Gift Tax Act too was abolished, but FA04 has revived it in the form of donee-based income tax, in place of donor-based gift-tax. Does this not look like we are taking one step forward and two steps backward? Let’s read in details.

The clubbing provisions in the ITA have not been deleted. Therefore, income from assets transferred directly or indirectly without adequate consideration to minor children, spouse (otherwise than in connection with an agreement to live apart) or daughter-in-law continues to be deemed as income of the transferor. Ditto for assets held by a trustee for benefit of the assessee, the spouse, daughter-in-law and minor children.

‘Indirectly’ implies income by way of salary, commission, fees or any other form of remuneration whether in cash or in kind from a concern in which such individuals have a substantial interest unless the spouse possesses technical or professional qualifications and the income is solely attributable to the application of his or her technical or professional knowledge and experience.

A strange fact in this is that gifts to daughter-in-law are clubbed but not gifts to son-in-law. Again, clubbing provision is applicable even if the daughter-in-law enters into an agreement to live apart. Moreover, ‘indirect’ gifts to daughter-in-law are not clubbed.

The entire income that arises or accrues to a minor is to be included in the income of that parent whose total income (excluding the income includible) is higher. Where the marriage of the parents does not subsist, the income of the minor will be included in the income of that parent who maintains the child. Once the income is included in the hands of one of the parents, it shall continue to be included, even if the criteria change, unless the AO is satisfied that it is necessary to do so. However, no clubbing will be applicable where the income of the minor child arises on account of any manual work done by him or from application of his skill, talent or specialised knowledge and experience.

An exemption up to Rs 1,500 with respect to each minor child can be claimed by the individual u/s 10(32).

Advantage of gifts

In the case of spouse or daughter-in-law, income-on-income is not clubbed. For example, if you have given your wife, who has no income, a gift of Rs 10 lakh and she invests this amount in an avenue earning 10 per cent per annum fully chargeable to tax, then after a year she will earn interest of Rs 1,00,000, which will be clubbed in your hands. At the end of the second year, she will earn an interest of Rs 10,000 in addition to the Rs 1,00,000 on the original deposit. The Rs 1,00,000 will continue to be clubbed but Rs 10,000 is chargeable to tax in her hands and obviously, this amount escapes tax. Continuing this strategy, sometime in future, she will come in the tax net. At this stage, she can get out of it by contributing up to Rs 1.5 lakh to avenues covered by Sec 80C. In the distant future, she may come into the 5 per cent tax zone and much later into the 20 per cent tax zone. Even then, there is a saving since the husband is in the 30 per cent zone.

Yes, income from gifted corpus is clubbed, but the dividend and the LTCG thereon are tax-free up to the specified limits. This renders clubbing provision toothless.

Now a strange aspect. When she travels into the 30 per cent zone, if she gives a gift to you, the income thereon will be clubbed in her hands separately. It does not neutralise the gift given by you. In other words, x – x ≠ 0.

This strategy can also be used for your daughter-in-law, but not for your minor children since their entire income, including interest on interest, suffers clubbing.

It is cumbersome to keep track of clubbable and not clubbable incomes, but it is worth the effort.

The authors A.N. Shanbhag and Sandeep Shanbhag are financial advisors and can be reached at wonderlandconsultants@yahoo.com

Print Rate this article:
1.5

Number of views (716)/Comments (0)

AN Shanbhag Sandeep Shanbhag
AN Shanbhag Sandeep Shanbhag

AN Shanbhag Sandeep Shanbhag

Contact author

Leave a comment

Name:
Email:
Comment:
Add comment

Name:
Email:
Subject:
Message:
x

Videos

Ask the Finapolis.

I'm not a robot
 
Dharmendra Satpathy
Col. Sanjeev Govila (retd)
Hum Fauji Investments
 
The Finapolis' expert answers your queries on investments, taxation and personal finance. Want advice? Submit your Question above
Want to Invest
 
 

Categories

Disclaimer

The technical studies / analysis discussed here can be at odds with our fundamental views / analysis. The information and views presented in this report are prepared by Karvy Consultants Limited. The information contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned in this report, investors may please note that neither Karvy nor Karvy Consultants nor any person connected with any associate companies of Karvy accepts any liability arising from the use of this information and views mentioned in this document. The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above mentioned companies from time to time. Every employee of Karvy and its associate companies is required to disclose his/her individual stock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis and investment recommendations are restricted in purchasing/selling of shares or other securities till such a time this recommendation has either been displayed or has been forwarded to clients of Karvy. All employees are further restricted to place orders only through Karvy Consultants Ltd. This report is intended for a restricted audience and we are not soliciting any action based on it. Neither the information nor any opinion expressed herein constitutes an offer or an invitation to make an offer, to buy or sell any securities, or any options, futures or other derivatives related to such securities.

Subscribe For Free

Get the e-paper free