Smart Gifting Strategies – Lawful Method To Reduce Tax Liability

Receiving gifts is a delightful experience, often wrapped in heartfelt emotions. However, receiving gifts may also have certain tax implications. This article examines the interplay between smart gifting strategies and the statutory provisions of the Income Tax Act, using real-life examples to illustrate lawful methods of reducing tax liability.

1. STRATEGY 1: GIFTING DEBT MUTUAL FUND UNITS: Let us begin with an illustration that demonstrates how strategic gifting of Debt Mutual Fund Units interacts with the provisions of the Income Tax Act.

Scenario: Mr. Ansh had invested Rs. 8 lakhs in debt mutual funds in 2020. As of 15th July 2024, the fair market value (FMV) of the investment had appreciated to Rs 15 lakhs. He gifted mutual fund units worth Rs 10 lakhs (FMV) to his mother Mrs. Neeta, who has no other source of income. Mrs. Neeta redeemed the units two days after receiving the gift.

Tax Implications:

(a) In the hands of Mr. Ansh: The transfer of a capital asset by way of gift is not regarded as a ‘transfer’, and therefore, no capital gains tax arises in the hands of the donor (Ansh) at the time of gifting. Section 47(iii) of the Income Tax Act

(b) In the hands of Ms. Neeta (the recipient) The gift received by Mrs. Neeta is not taxable in her hands, as gifts from specified relatives—such as her son—are fully exempt from tax, regardless of the amount.

Even the capital gains from the redemption of debt mutual fund units do not attract any tax liability. Since Mrs. Neeta has no other income, her total income of Rs. 10 lakhs qualify for a full rebate under Section 87A, effectively making her tax liability nil.

As per the revised tax rules (effective 1 April 2023), Gains from specified mutual fund units, such as non-equity or debt-oriented funds are added to ‘Income from Other Sources’ and taxed as per the individual’s income tax slab rates.

2. STRATEGY 2: SHARING CAPITAL ASSETS: Transferring a portion of Capital Assets, such as shares or mutual funds, to a relative (as defined under the Income Tax Act) can be a tax-efficient strategy. When the recipient later sells the asset, both the donor and the recipient can independently avail the basic exemption limit and the Rs 1.25 lakh exemption on long-term capital gains under Section 112A, thereby splitting the capital gains and legitimately reducing the overall tax liability.

Scenario: Mr. Rajiv holds listed equity shares with a long-term capital gain potential of Rs 10 lakhs. To minimize tax liability, he gifts shares with an embedded gain of Rs 5 lakhs to his adult daughter, Ms. Riya, who has no other income.

Both Mr. Rajiv and Ms. Riya sell their respective shares in the same financial year. As per Section 112A, each is entitled to a Rs 1.25 lakh exemption on long-term capital gains.

Tax Outcome: Mr. Rajiv pays tax on Rs 3.75 lakhs (Rs 5 lakhs – Rs 1.25 lakh exemption).

Ms. Riya also pays tax on Rs 3.75 lakhs of LTCG. Since Ms. Riya has no other income, she can utilize her basic exemption limit of Rs 4 lakhs along with the Rs 1.25 lakh exemption under Section 112A.

The overall tax is lower than if Mr. Rajiv had sold the full Rs 10 lakhs gain himself, as Rs 2.5 lakhs of gain (₹1.25 lakh each) gets exempted in this split structure.

This strategy works best when the recipient is in a lower or nil tax bracket, and the transaction is planned with proper documentation.

3. STRATEGY 3 SET-OFF OF CAPITAL GAINS AGAINST LOSSES ON GIFTED SHARES: A taxpayer can set off capital gains against capital losses—including losses on shares received as a gift from a relative. As per Section 49(1), when a capital asset is received as a gift, the recipient assumes the original cost of acquisition of the previous owner. Furthermore, the holding period of the previous owner is also considered, as per Section 2(42A).

This opens up a legitimate tax planning opportunity where loss-making shares held by a relative can be transferred by way of gift, enabling the recipient to utilize the capital loss to reduce taxable gains.

Scenario Mr. Anupam has earned Long-Term Capital Gains (LTCG) of Rs 4 lakhs during the financial year. His adult son, who is a relative as defined under the Income Tax Act, holds equity shares with an unrealized Short-Term Capital Loss (STCL) of Rs 1.75 lakhs.

In order to optimize tax liability, the son gifts the loss-making shares to Mr. Anupam. Since gifts from a relative are not taxable under Section 56(2)(x), there is no tax on the transfer. Mr. Anupam then sells the shares, realizing a STCL of Rs 1.75 lakhs, which he sets off against his LTCG of Rs 4 lakhs

Tax outcome:

Only Rs 1,00,000 of capital gains will be taxed at 12.5%, resulting in significant tax savings.

4 STRATEGY 4 TRANSFERRING PROPERTY TO MAJOR CHILDREN Another strategic option for reducing capital gains tax is to gift property to adult children (18 years or older) before selling it, instead of gifting the amount after the sale of the property. Transferring ownership beforehand allows the capital gain on sale to be split across more individuals, helping each utilize their exemption limits and slab benefits.

Scenario: Mrs. Sharma had purchased a residential property in 2005 for Rs. 20 lakhs. In 2025, she contemplated whether to sell the property herself and gift the sale proceeds to her two children or first transfer the ownership among all three of them—herself and her two adult children—and then proceed with the sale.

She chose the second option. Before selling the property, Mrs. Sharma executed a gift deed transferring equal ownership shares to her two adult children. The property was eventually sold for Rs. 90 lakhs, resulting in a long-term capital gain (LTCG) of Rs. 70 lakhs.

Since the property was jointly held at the time of sale, the capital gain was divided equally, with each co-owner—Mrs. Sharma and her two children—reported Rs. 23.33 lakhs as LTCG in their respective tax returns.

This strategy allowed the family to spread the tax liability, enabling each individual to utilize their respective exemption limits and available deductions, thereby optimizing overall tax outgo.

Each of them can now claim reinvestment exemptions under Section 54 of Income Tax Act (if proceeds are reinvested in another residential property)

This way, the overall tax outgo is substantially reduced, compared to the entire gain being taxed in the mother’s hands at 12.5% without indexation from the previous 20% with indexation. (plus, surcharge and cess).

Important Conditions:

• The gift must be irrevocable and backed by a registered gift deed.
• The cost of acquisition and holding period of the original owner is inherited by the recipient for capital gains calculation (Section 49(1) and Explanation (iii) to Section 2(42A)).
• This strategy works best when recipients do not fall under clubbing provisions, i.e., minor children’s income will still be taxed in the parents’ hands under Section 64(1A).

Relevant Provision of Gifting under the Income Tax Act

5. “Relative” as defined under Explanation to Section 56(2)(x): Gifts received from specific relatives are not taxable, irrespective of the amount. The term relatives include the spouse of the individual, sibling of the individual or of the spouse, sibling of either parent, any lineal ascendant or descendant i.e. parents, grandparents, children, grandchildren & spouse of any of these relatives.

5.1 New Income Tax Bill expanded the gift exemption to include both parents’ and spouse’s lineal ascendants. Gifts received from maternal grandparents and other relatives on the mother’s side are now exempt from tax.

5.2 Cousin is not covered under the definition of the Income Tax Act and thus the gift received from a cousin is taxable in the hands of the receiver.

5.3 An interesting fact is that while a gift received by a nephew from his uncle is exempt from tax, a gift given by a nephew to his uncle is taxable in the hands of the uncle.

5.4 Spouse’s Uncle or Aunt does not fall under the definition of relatives. For example, Mrs. Neeta received Rs 51,000 from her husband’s aunt or uncle The amount of Rs. 51,000 will be taxable in Neeta’s hands under this provision.

6. Gifts received on marriage. Any gift received on the occasion of marriage in any form viz, property, house, car, cash, jewellery, etc. is exempt from taxation.

6.1 Cash gifts exceeding Rs 2,00,000 from a single person (even from a specified relative) on the occasion of marriage, attract a penalty under Section 451 of the Finance Bill 2025.

6.2 Gift on marriage is exempted only for the person getting married, not to their parents, siblings, or any other relatives. If gifts are received by the individual’s parents, siblings, or any other relatives in connection with that marriage, such receipts would not enjoy the exemption and would be taxable in their hands. – held by the Punjab & Haryana High Court in the case of Mr. Rajendran v ITO (2013)

6.3 The expression ‘on the occasion of the marriage’ does not confine the receipt of the gift only to the day of the wedding or during ancillary functions with the wedding.

6.4 Any income earned out of gifts received on the occasion of marriage is taxable.

6.5 It is advisable to keep a detailed record of all the gifts received at the wedding, including their value and the details of the person who gave the gift. This documentation shall act as genuine proof at the time of scrutiny proceedings by the Income Tax Department.

6.6 Gifts received on occasions such as birthdays, naming ceremonies, or any event other than a wedding, from friends or non-relatives, are taxable if the aggregate value exceeds Rs 50,000 in a financial year.”

7. Clubbing Provisions for Gifts Any income generated from a gift given to a spouse, minor child, or son’s wife will be included in the income of the giver, as per the clubbing provisions of the Income Tax Act.

In case, the house property has been transferred otherwise than for adequate consideration to the spouse or to a minor child, the donor will be considered as the owner of such house property and the rental income from such property will be considered as the income of the individual. Clubbing provisions are not applicable when there is adequate consideration.

In the case of a gift of any asset to a minor child, the income from such a gift will be considered the income of the parent whose total income is greater.

8. Gift of any property “other than Immovable Property”: Shares & securities, jewellery, archaeological collection, drawings, paintings, sculptures, any work of art, bullion, and virtual digital assets have been included in the definition of any property other than immovable property

8.1 Shares received as a gift are exempt from tax if they are received from specific relatives (as defined under the Act), under a will or inheritance, or on special occasions like marriage.

8.2 Gifting of shares to a relative does not attract any income tax, and the amount is not taxable in the hands of the receiver either.

8.3 However, if shares received as a gift from relatives are immediately sold after receiving, the resulting income is taxable under the head ‘Income from Capital Gains.’ The holding period is calculated from the date of purchase by the previous owner to the date of sale. The cost of acquisition is the purchase price of the shares from the previous owner.

9. Gift of shares & securities from friends/ non-relatives: Shares received as a gift from friends (i.e., non-relatives as per the Income Tax Act) are taxable under Section 56(2)(x). If the fair market value (FMV) of such shares exceeds Rs 50,000 in aggregate during a financial year, the entire FMV of the shares is taxed as “Income from Other Sources” in the hands of the recipient. However, if the total FMV does not exceed Rs 50,000, the gift is not taxable.

10. Gift of immovable property Immovable property, received by way of will or inheritance, or if received from any relative, would not be subject to tax. It will neither invite any capital gain nor be considered ‘income from other sources.

However, if the property received as a gift from relatives is immediately sold after receiving, the resulting income is taxable under the head ‘Income from Capital Gains.’ The holding period is calculated from the date of purchase by the previous owner to the date of sale. The cost of acquisition is the purchase price of the shares from the previous owner.

Any rental income earned out of gifted immovable property is taxable in the hands of the person who received the gift.

11. Gift of immovable property from friend / non–relative: In case of gifting of immovable property (i.e., land or building) from non- non-relative / friend, the recipient would be required to pay income tax if the stamp duty value of the property exceeds Rs 50,000 and such property is received without adequate consideration.

Any inadequate consideration received wherein the difference between the consideration and stamp duty value exceeds the higher of Rs 50,000 and 10 percent of the consideration, such difference shall be taxed in the hands of the recipient.

12. Reporting of Gifts Received in ITR, it is advisable to report the gifts received from relatives as Exempt Income for transparency. This should be disclosed under “Schedule EI” (Exempt Income) in the ITR form. The specific ITR form to be used will depend on the receiver’s overall sources of income.

13 Gifts received in the form of shares need not be reported in ITR

14. Possible ITO Queries during scrutiny of Gift transactions: Though receiving a gift from specific relatives is not taxable, the Income Tax Officer may ask the details during scrutiny of the return: (a) Name, PAN, and relationship of the donor. (b) Mode of receipt (bank transfer/cheque/cash, etc.). (c) Gift deed/affidavit executed, if any. (d) Source of funds of the donor (e.g., bank statement, ITR of the donor). (e) Confirmation letter from the donor. (f) Evidence to prove that the donor qualifies as “relative” as per Section 56(2)(x) Explanation (e.g., birth certificate, family tree, etc.).

15. Gifts from an employer are taxable as perquisites; however, gifts in kind (not cash) up to Rs. 5,000 in value per financial year are exempt under Section 17(2)(viii).

16. Gifts from an NRI are taxable unless the donor is a specified relative or the aggregate value does not exceed Rs. 50,000 in a financial year.

Conclusion: Gifting, if done wisely and within the law, can help reduce a family’s overall tax burden. It’s a smart way to save tax and plan for the future at the same time.

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Disclaimer: The article is for educational purposes only.

The author can be approached at caanitabhadra@gmail.com