An amount gifted to a relative will be free of income tax

Written by AN Shanbhag | Sandeep Shanbhag | Updated: Nov 30 2008, 07:09am hrs
I am salaried and have an option to park my surplus cash in VPF at 8.5%. My retirement is 10 years away. Which one will be better for me, BNB or VPF

Tridiv Dutta

Whereas VPF will give you 8.5% tax-free, BNB will earn you 8.41% after tax. So both options are equally good, but since you already have a substantial amount in VPF, one would suggest going in for BNB.

I intend to make a gift of Rs 2 lakh to my nephew. In this regard, my questions are

1) What will the tax treatment of this gift be on me as well as my nephew

1) What is the procedure to be followed while giving gifts to relatives

2) Is any gift deed to be prepared If yes, what is the stamp duty applicable

3) Is the gift deed required to be registered If yes, with which authorities

Vijay Mogare

There will be no tax incidence of the transaction on either you or your nephew. This is in view of the provisions of Sec 56 of the Income Tax Act that exempts gifts given to a relative. As per the definition provided in the said section, your nephew will qualify to be your relative and hence any amount gifted to him will be free of income tax.

As regards the procedure, generally, it is better to prepare a gift deed and get it registered (with related stamp duty) but such a precaution is normally needed in the case of high-value gifts, particularly those of real estate. For our purposes, all that is required is an offer by the donor and acceptance thereof by the recipient carried out in black and white.

In other words, the donor can offer the gift and the recipient should accept the same in writing (maybe through a thank you note). Only then it would be considered as a gift in India. It is preferable to mention the relationship between the donor and the recipient and both parties concerned should keep this document on file for ready reference whenever needed.

How are short-term capital gains computed on the daily dividend option of liquid funds Is there any tax liability on the appreciation in the principal amount at the time of redemption Will the case be different in case it is an equity fund rather than a liquid fund

Kirti Chhaya

Choosing the dividend option is akin to actually receiving the dividend and then reinvesting the same. Though the reinvestment takes place directly at the fund level, there are in fact two legs to the transaction. The first leg is the receipt of dividend, which will be subject to the dividend distribution tax. This is taken care of by the mutual fund at source. Hence the amount is tax-free in your hands. The net amount that you are entitled to receive gets reinvested at the ex-dividend NAV. To that extent, this second leg is akin to making a fresh investment on the applicable date and the applicable NAV. Capital gains are calculated in the usual course. The long-term or short-term nature of the same would depend on the period of investment. If the same is over one year, the gains are long-term, else they are short-term.

In the case of equity funds, the same principles will apply. However, in this case, the dividends do not suffer distribution tax. Also, short-term gains are taxed at 15%, whereas long-term gains are tax-free. However, the tax principle remains the same.

I had invested in a 5-year post office RD, which has matured and I received it in cash in my native place. Since I am not intending to go there immediately, I gave it to my father and asked him to open an FD for one year in his name.

1) Since the money has not been remitted into my bank account this year, should I be paying tax on this income this financial year

2) Next year when I get the money from my father on maturity of FD, how will I show it in my returns Will it be better to show it as a gift or as something else

My father is retired and does not fall in the tax bracket

Bindu M B

Whether you get the maturity in cash or by cheque, it is your income and tax is payable by you. It is your call if you wish to do so or not.

You have since given the money to your father for opening an FD in his name and this will be tantamount to your gifting him the money. Later, when he gives you back the proceeds, he will be gifting the funds back to you. Such gifts between immediate family members are tax-free. However, the income from the FD will be added to your fathers income. After adding, if he continues to be below the taxable limit, he need not file a return.

The authors may be contacted at wonderlandconsultants@yahoo.com