Wednesday, July 26, 2017

Your son overseas sent you some money. Should you pay tax?

Many individuals overseas do send money to their parents in India. This money is treated as gift and one need not pay any tax on it, but keep a record of such receipts.

Sometimes children support their parents financially. Children settled abroad make transfers to account of parents to support them. A lot taxpayers are unsure about the tax treatment of such transactions. Let’s take a look at the tax implications –

When money is transferred to a parents account 

If you transfer money to your parent’s account there is no tax implication for you as a giver or for them as a receiver. They don’t need to pay tax on this gift. As per the income tax act, exchange of gifts between relatives are exempt from tax. Relatives includes your parents, your spouse, your spouse’s parents, your brother & sister and their spouses, including your spouse’s brother & sister and their spouses. Any of you or your spouse’s lineal ascendant or descendant are also included. Any gifts in cash, bank transfer or cheque or in kind exchanged between you and these relatives is not taxable. This is irrespective of whether they have any taxable income or not.

When money received is invested in fixed deposits, shares or other avenues

When you transfer money to your parents account so they can buy a house, or a car or invest money in fixed deposits, or buy shares, there is no tax on the receipt of this money. But any income that will arise from these investments shall be directly taxable in your parent’s hands. For example, your parents deposit the money received in a fixed deposit account in their own name, any interest income earned is directly taxable for them. No clubbing of income is attracted is such a case. Similarly, when they use the funds to invest in shares and incur capital gains and losses, those are reported in your parent’s tax returns and tax paid on them accordingly. 

When money is returned to the children 

If the parents decide to transfer money back to their children, again this transfer is considered as a gift and there is no tax implication for the giver or receiver. Also, any income earned by the children from such funds or income from assets purchased from these funds shall be taxable directly in the hands of the children. However, this is only true for transfer of money to adult children. In case funds are transferred to account held by a minor child, any income thereon shall be taxable in the hands of parents. Such income earned by a minor from transfer of funds by parents is clubbed with the income of the parent. 

Any sums of money or asset received from parents by way of a will or inheritance is exempt from tax.

Reporting of receipts from children or parents

If you have received a large sum of money as gift, you can choose to report this receipt under exempt income in your tax return. Though there is no specification for reporting gifts under exempt income, since these are not taxable in the first place. In case of receipts of large sums or fixed payments, it is also recommended that a proper documentation of the gift transaction be maintained.

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