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Infosys co-founder N R Narayana Murthy recently gifted 15 lakh shares of the company to his grandson Ekagrah Rohan Murty, valued at approximately Rs 240 crore, according to a regulatory filing. Even if you are not a tech billionaire, gifting financial assets to family members is a great idea, as such gifts have the potential to grow exponentially in value over time. However, you need to be mindful that each instrument is governed by a different set of gifting rules and could also be taxed differently.
Fixed Deposit
In India, a fixed deposit (FD) can be gifted to any individual, including family members, relatives, or friends. “However, minors cannot directly own FDs. In such cases, the minor’s guardian manages the FD until the minor reaches adulthood,” says Nehal Jain, associate, SKV Law Offices.
A ‘relative’ in this situation refers to the spouse of the individual giving the gift, brother or sister, brother or sister of the spouse of the individual, brother or sister of either parent of the individual, any lineal ascendant or descendant of the individual, any lineal ascendant or descendant of the spouse of the individual, and spouse of any of the persons referred to above.
According to Section 56 of the Income-Tax (I-T) Act, if you transfer money from your FD account in your relative’s name, the transaction will be deemed a gift between designated relatives, and neither you nor your spouse will be responsible for paying any taxes on the gift or transfer of funds.
“However, under Section 64 of the I-T Act, the interest arising from such FD shall be clubbed in the taxable income of the one making the gift and taxed at applicable tax rates,” says Adithya Reddy, international tax lawyer.
M Barve, founder, MB Wealth Financial Solutions, says, “You could start a fixed deposit jointly with the person you wish to gift to.”
Instead of gifting an ordinary FD, one can gift a tax-saving FD, which comes with a five-year lock-in period but is eligible for a deduction of up to Rs 1.50 lakh under Section 80C of the I-T Act. “This can be done by transferring the funds to the recipient’s bank account and then making the tax-saving FD from that account,” says Alay Razvi, partner, Accord Juris LLP.
Stocks
Stocks can be gifted to anyone, including family members, friends, or charitable organisations. Barve explains that this can be done by submitting the necessary forms to your broker.
If the gift is given to a spouse, daughter-in-law, or minor child, the income from those shares gets clubbed with the donor’s income.
As for the recipient, if the gift is received from a relative, there is no tax implication. But if the gift is received from a non-relative and exceeds Rs 50,000 in value during a financial year, the entire value of the gift is taxable.
“Gifts of movable property such as shares, exchange-traded funds, mutual funds made without consideration and exceeding the fair market value of more than Rs 50,000 are taxable in the hands of the recipient under Section 56(2) of the I-T Act,” says Reddy.
Such gifts are taxed under the head “income from other sources” at normal slab rates. “To determine the value of the shares gifted, their fair market value on the date of gifting is considered,” says Razvi. Any dividend received from the gifted shares is also taxed in the hands of the recipient.
The recipient also becomes liable for taxation upon selling the stocks. “Capital gains tax applies to the profit made from selling the gifted stocks,” says Jain.
Mutual funds
Regulations make it difficult to gift mutual funds. Here are a few ways in which they can be gifted to minors. One, you may transfer funds to the minor’s bank account for the purchase of mutual fund units. Two, the guardian can create a joint account with the minor and units can be purchased there. Three, a person can invest in their own name and designate the minor (say, a grandchild) as the nominee, instead of investing in the minor’s name.
Ensure you stay on the right side of the law when making or receiving gifts. “Make a gift deed so that the transaction can be substantiated before the tax authorities,” says Barve.
Gift deed versus will
· A gift deed allows for the immediate transfer of property
· Once the deed is executed and registered, the donee becomes the legal owner of the property
· In a will, the transfer of property only happens after the demise of the will-maker
· Since the transfer happens immediately, it significantly reduces the chances of future litigation among heirs or potential claimants, common in cases of inheritance through wills
· A gift deed, once registered, provides a clear title to the property, making future transactions involving the property simple
