Transferring money to family to save tax: Smart move or legal risk?
Published by India Today
Abhishek Kumar's role: Quoted
Abhishek Kumar said such transfers cut tax only when properly structured, as clubbing rules can apply. He explained how returns are taxed for adult and minor children and spouses, cautioned against transfers meant to hide income, and listed the documents to keep.
What Abhishek Kumar said
Does transferring money to family members actually reduce tax?
It cuts the tax bill only if the person who receives the money invests it in a lower tax bracket or in tax-exempt instruments. Even then, clubbing provisions may tax the income in the hands of the person who gave the money, so the approach works only when it is structured properly. Legitimate savings are possible mainly with adult children or relatives who fall outside the clubbing rules.
Who pays tax on returns from money gifted to a child or spouse?
An adult child pays tax on the returns at their own slab rate. For a minor child, the income gets added to the parent's own income and the parent pays the tax, unless the money was a gift from a grandparent or another relative. Where a husband or wife puts the gifted money into an investment that changes its form, any income it produces is added back to the giving spouse's income under Section 64.
When do family money transfers become risky?
The risk starts when a transfer is designed to hide income. Routing money through relatives to build false records, to make black money look white or to skip proper paperwork invites scrutiny, and the tax department watches large cash transfers closely. Also remember that gifts from non-relatives that cross ₹50,000 in a financial year are taxed in full under the head 'Income from Other Sources'.
What documents should I keep when gifting money to a relative?
Keep identity proof of both the giver and the receiver, proof of your relationship, bank statements showing the transfer, a gift deed where property is involved, and a written note explaining why and on what occasion the gift was made. I suggest avoiding cash and using bank transfers so there is a clean audit trail; for property, the gift deed should be registered, with the correct stamp duty paid and witnesses present.
In our words, from what he said in the piece. General information, not personal advice.
More of Abhishek's views on money management
The article examines whether moving money to family members to lower one's tax bill works under Indian tax law. It explains clubbing provisions, who counts as a relative for gift rules, how returns are taxed for adult and minor children and spouses, and the paperwork needed to keep such transfers clean.
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Transferring money to family to save tax: Smart move or legal risk?