- 18-Apr-2025
- Education Law
In India, gifting money to children is a common way to transfer wealth, but it’s important to ensure that such gifts do not attract unnecessary tax implications. Section 56(2) of the Income Tax Act governs the taxability of gifts, but gifts made to relatives, including children, have specific exemptions. To make sure the money gifted to children is tax-free, there are certain legal methods and strategies that can help minimize tax liability for both the donor and the recipient.
Under Section 56(2) of the Income Tax Act, gifts made to relatives are tax-free. Children are classified as relatives, and as such, any money gifted to children is not subject to gift tax or income tax at the time of gifting.
No upper limit is imposed on the amount that can be gifted to children tax-free, making it an excellent option for tax-efficient wealth transfer.
To ensure the gift is valid and the transfer of money is clear, it is advisable to create a gift deed (though not legally mandatory for gifts to relatives), which can help in case of disputes or for legal documentation.
While gifts to children are exempt from tax, it’s important to be aware of the annual exemption limit for non-relatives. Gifts exceeding Rs. 50,000 in a year (other than gifts to relatives) are taxable under Section 56(2).
This limit does not apply to gifts made to children or other relatives, so it’s safe to gift large sums of money without worrying about this threshold.
To make gifting money to children transparent and easy, transferring money through bank accounts or digital payment platforms (like RTGS, NEFT, or UPI) is ideal. These methods provide a clear record of the transfer, reducing the risk of any confusion or legal issues.
It’s also advisable to maintain a transaction record and document the purpose of the transfer as a gift to avoid any misunderstanding that might arise with the tax authorities.
Money gifted for specific purposes, such as education or medical treatment, is generally not taxable, even if gifted in large amounts. For example, if you give money to your child specifically for their higher education fees or medical bills, this can be a tax-efficient way of transferring funds without incurring tax liability.
This method also applies when paying directly to the educational institution or hospital on behalf of your child, as such payments are not treated as gifts.
A family trust can be a tax-efficient way to gift money to children. By setting up a trust, parents can transfer assets or money to the trust for the benefit of their children.
Income generated from the trust is typically taxed in the hands of the beneficiaries (children), which could allow for tax planning to ensure the tax burden is minimized based on the children's lower income tax brackets.
A trust is useful if you want to have more control over how and when the money is distributed to children, and it can also help in managing assets in the long term.
Gifts given to children for marriage are also typically not taxed, provided they are made by a relative (such as a parent) and the money is intended for the specific purpose of marriage expenses. This allows parents to gift significant sums of money without the risk of tax implications.
Although gifts to children are exempt from tax, it’s always recommended to document the transaction clearly. A gift deed (especially for substantial sums) or a simple letter stating the intention behind the gift can ensure clarity in case the tax authorities seek proof of the gift.
Gift deeds are particularly useful for high-value gifts or when real estate or assets are gifted. For cash, though, documentation like bank transfer records can suffice.
If the gifted money generates income (such as interest from a fixed deposit or capital gains from investments), the income tax on this income will be payable by the child who receives the gift. This income will be taxed as per the child’s tax bracket.
If the income is from money gifted to minor children, the income will be taxed in the hands of the parents under Section 64(1A), unless the child has a substantial source of income from their own work or talent.
Money gifted to minor children for investing or other purposes will also be subject to income tax if the investment generates returns. However, the parents can claim the tax exemption or deductions for the educational expenses or other exemptions as applicable.
A parent gifts Rs. 5 lakh to their adult child via a bank transfer. As the gift is being made to a direct relative (child), the transfer is exempt from gift tax and there is no tax implication on the gifted amount.
The parent should ensure the transaction is documented for clarity (such as through a bank transfer receipt or a gift deed).
A parent gifts Rs. 2 lakh to their child for higher education fees. Since the money is being used for education (a specific purpose), the gift is exempt from taxes. If the parent directly transfers money to the educational institution, it may not even be categorized as a gift under tax laws.
The best way to gift money to children without tax implications in India is by gifting directly to relatives (children), as gifts to family members are exempt from gift tax under Section 56(2). For large sums, documenting the gift through bank transfers or gift deeds ensures transparency. Other methods like gifting for education or using family trusts can further optimize tax efficiency. Always ensure compliance with legal documentation and maintain records to avoid any future tax concerns.
Answer By Law4u Team
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