This festive season gift a financial instrument and watch its value grow

Be mindful that gifts above ~50,000 from non-relatives are taxable in recipient’s hands, except during a wedding

Most people have begun shopping for festival gifts for their family and friends. One option that people may consider is gifting a financial instrument, instead of goods, as its value could multiply manifold over the years.

However, while doing so be mindful that each instrument is governed by a different set of gifting rules and is taxed differently.

Fixed deposits

You could start a fixed deposit (FD) jointly with the person you wish to gift to. You could also gift the person cash with which she could start an FD.

How the transfer and the interest generated by the deposit are taxed depends on several factors. Says Adhil Shetty, chief executive officer (CEO), Bankbazaar.com: “Receipts from your or your spouse’s immediate relatives are tax exempt. The interest the deposit generates will be taxed according to your tax slab. However, the interest generated by the deposit can sometimes become taxable in your hand under incomeclubbing rules.”

For example, if you make a gift to a minor and the FD generates interest, it must be clubbed with your income (after an exemption of ~1,500).

If the cash is gifted to someone other than a relative, it could be fully taxable or tax-exempt. If it is received on an occasion other than marriage, or if the total value of the gifts received by this person in a year exceeds ~50,000, the value of all the gifts is fully taxable. Shetty adds, “If the receipts are for their wedding or valued under ~50,000, the gift is tax exempt. The interest generated on the FD will be taxed at the recipient’s slab rate.”

Stocks

You can gift a stock by submitting the required forms to your broker. Says Jharna Agarwal, head-products, Anand Rathi Preferred: “Firstly, submit a delivery instruction slip (DIS) mentioning the stock’s details and the recipient’s demat number. Then the recipient should submit a receipt instruction with the same details.” Once matched, the gift transfer is completed. The transferor is not taxed. Says Gopal Bohra, partner, NA Shah and Associates: “The income earned on such shares will, however, be clubbed if the gift is given to a spouse, daughter-in-law, or minor child.”

The recipient is not liable to pay taxes if the gift is from a relative, which includes spouse, children, parents, brothers, sisters, lineal ascendants and descendants. Adds Bohra: “If the gift is received from a non-relative and the value exceeds ~50,000, it is taxable in the receiver’s hands.”

Life insurance policies

Section 80D of the Income Tax (IT) Act allows a person to buy life insurance for a direct relative. Naval Goel, founder and chief executive officer, Policyx.com, says, “You may buy life insurance for another person if you have an insurable interest.” Insurable interest means you should be able to prove that the insured’s death would burden you financially.

Relatives can buy life insurance for each other—spouse and ex-spouse who are divorced, parents can buy for kids and adult kids, grandparents can buy for grandkids, siblings for each other, kids for parents, and one can also buy for business partners.

The person paying the premiums can take the benefit of section 80D tax deduction.

Mutual funds

Regulations make it difficult to gift mutual funds (MFS). Agarwal says, “It can't be done owing to restrictions on payment by a third party.”

The latest rules offer some leeway, however. Says Harshad Chetanwala, co-founder, Mywealthgrowth: “To gift MF units to a minor, transfer the funds to his bank account. You can also transfer money to a joint account of the minor and the guardian. Purchase of units can happen from there.”

Gifts received are prone to litigation, so ensure that you stay on the right side of the law. Says Vivek Jalan, partner, Tax Connect Advisory Services: “Make a gift deed so that the transaction can be substantiated before the tax authorities in the future.”