Diwali means sharing happiness. For most parents out there, giving ‘shagun ka lifafa' to their children is a part of the celebration. From Rs 5,000 as pocket money for shopping to Rs 1 lakh as gift money, most of the time, this amount goes directly into their kids' bank accounts. However, have you ever thought about whether this money is subject to income tax?
The good news is that any money given to the child by their parents is tax-free, no matter how much. As per Section 56(2)(x) of the Income Tax Act, gifts received from certain specified relatives, such as parents, are exempt from income tax. Therefore, even if a father gives Rs 2 lakh to his daughter during Diwali, she need not pay tax on it.
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However, there is something parents should not overlook before you send out gifts on Diwali. This year, the festival of lights will be celebrated on Sunday, Nov. 8.
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What Happens If Your Child Invests The Gifted Money?
Let us understand this with the help of an example.
Imagine Amit gifts Rs 1 lakh to his 15-year-old son as a Diwali gift. His son deposits the amount in a fixed deposit account and earns Rs 7,000 interest in that financial year.
Even though the initial amount of Rs 1 lakh given as a gift is tax-exempt, the interest income will have to be taxed. This is because, according to the provisions of minor income clubbing rules, the interest income will be treated as the income of the parent whose income is higher (unless there are any exceptions).
A Few Things Parents Should Keep In Mind
It is better to transfer through banks than to make huge cash gifts to keep a record.
The transaction record and bank statements should be maintained as evidence of the gift.
Also note that the taxation on the gift and the income received from it may be different.
See the clubbing provisions if you are making a gift to a minor.
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Giving shagun ka lifafa to children on Diwali is a lovely tradition, and tax rules should not make it stressful. Just understand the difference between a tax-free gift and the income earned from that gift before making the transfer.
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