Photo: Mint
Photo: Mint

Gifts made to parents are not taxable in their hands

Clubbing of income does not apply for income earned on money gifted by children to their parents

I work in the US. I send about 50,000 to my parents every three months, which they invest. In all these investments, I am the second holder. Who is liable to pay tax on any income from these investments? Will the income be taxed in my name or my parents’?

—Nandita Devgan 

Gifts made to parents are not taxable in their hands or in your hands. Also, clubbing does not apply for income earned on money gifted to parents. So, in case they decide to invest the money received from you, any income from such investment will be taxed in their own income tax return, and will not be clubbed with your income. Since your parents are the first holders, income must be reported in their own income tax return.

My father-in-law has a property that he wants to sell. Once sold, what will be the most effective way to have the money sent to Canada. How can we limit our tax liability? Is it better to claim long-term capital gains (LTCG) in India or Canada?  

—Name withheld on request 

Gains from sale of property situated in India are taxable in India. Therefore, even though your father-in-law may be a non-resident in India, this sale and the corresponding gains will have to be reported by filing an income tax return in India. When a property has been held for at least two years, gains from its sale are considered LTCG. If it has been held for less than two years, the gains are considered as short-term capital gains (STCG). In case you have earned long term capital gains, a tax of 20% (excluding cess) will have to be paid. To calculate these gains, you are allowed to index your cost of acquisition. STCG is taxed according to your tax slab. You can avoid paying tax on LTCG by investing it. This can be done by purchasing another house property, which must be situated in India. This property may have been purchased one year before or two years after the sale. Or you may invest the proceeds in capital gains bonds. Up to a maximum of 50 lakh can be invested in one financial year in these bonds. If you decide to invest in a property, and the transaction has not been completed before the due date of filing of your tax return for the financial year, you must deposit the sum in a Capital Gains Account Scheme. Later, this money must be used to buy a house property within the specified time period; if not utilised, capital gains tax may have to be paid. In case you decide to repatriate the entire sales proceeds, you’ll have to first pay tax on it in India. You can then repatriate up to $1 million to Canada from your non-resident ordinary or NRO account. This remittance will require a certificate from a chartered accountant that will have to be submitted to the remitting bank.

Note that the buyer is likely to deduct TDS at 20% (excluding cess) from the payment that is made to you, in case your gains are long term. In case your gains are short term, a TDS of 30% (excluding cess) may be deducted. In case you decide to reinvest LTCG, your total income is likely to be taxed at a lower rate than 30%, and a lower TDS must be deducted; you can obtain a certificate from an income tax officer and submit it to the buyer so that lower TDS is deducted.

Archit Gupta is founder and chief executive officer, ClearTax. Queries and views at mintmoney@livemint.com

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