Can gifting assets to family members help save taxes?

Key insights on the taxation rules behind family asset transfers and clubbing of income

- Jash Kriplani

Transferring assets within the family might seem like a straightforward way to share wealth, but the tax rules surrounding such transfers can be more complex than they appear.

For instance, if assets are gifted to a spouse, income generated from those assets will be clubbed with the income of the person who originally owned the asset.

For a minor child, income generated from these assets will be clubbed with the income of the highest-earning family member.

Any income of a minor child, unless it is actively earned by the child, is liable to clubbing provisions, which are aimed at curbing tax avoidance through asset transfers to family members.

Let's break down the rules and exemptions on income clubbing.

Transfers to relatives

The clubbing provisions primarily apply to transfers to a spouse or minor children.

Gifting assets to others such as parents, in-laws, or a major child, does not trigger the rules.

Gifts to them are also tax-exempt, and the person receiving the gift is not liable to pay taxes.

"Gifts don't trigger tax liability for the receiver, as long as gifts are made to specified relatives," Prakash Hegde, a chartered accountant, said.

Assets like property, stocks, mutual funds and bonds can be gifted to parents, in-laws or major children, and income from such assets are not part of clubbing provisions.