r2i forum

Dear Members:
I am in a peculiar situation. Please advice me with your inputs.

When I was a NRI 7 years ago I gifted 30 Lakhs to my wife (house wife) which she invested in tax exempted RBI Bonds 100% on her sole name. She received 15 Lakh rupees tax exempted interest.

Upon maturity the principal and interest both was deposited back again to our bank account which is on joint name of myself and my wife.

But then during the course my situation totally changed. Due to mental illness & health constraints I am not able to work and now I am taking rest at home. Which means that myself & my wife are both unemployed and totally depending on the interest income. For convenience we have funds parked in our Joint Account.

I have the following questions:

1) My wife can gift back (portion or total) of original amount (i.e. 30 Lakhs) which I gifted her 6 years ago?

I want to keep the tax-exempted interest (15 Lacs) with my wife and keep portion or full original amount (30 Lacs) on my name so that she can develop her own corpus funds so that she is also happy. Any Interest she earns on this interest income will be hers and taxable in her hands. Is that true? Pls Advice

2) Can she gift to me the tax exempted RBI bond interest income received by her (i.e. 15 Lakhs) ?

3) As I am not doing good in my health, I want FD on my name as a future security. Because of my ill-health I am worried about my security now. Kindly advice me with respect to income tax.

4) Once that amount gifted to wife, whether the gift can be taken back? I read in one site that gifts cannot be taken back one gifted to wife. Is that true? If that is the case then can I take back the full or portion of Principal and Interest amount? Pls Advice.

5) Taking back the original gifted amount and leaving the Interest income with my wife is permissible by Income Tax? Because we both need not pay tax on this by doing this way. Is not this a tax evasion? Pls advice.

6) Please suggest me the best way to save tax and also I get a sort of financial security from the total capital.

nsrikanth21;285059Dear Members:
I am in a peculiar situation. Please advice me with your inputs.

When I was a NRI 7 years ago I gifted 30 Lakhs to my wife (house wife) which she invested in tax exempted RBI Bonds 100% on her sole name. She received 15 Lakh rupees tax exempted interest.

Upon maturity the principal and interest both was deposited back again to our bank account which is on joint name of myself and my wife.

But then during the course my situation totally changed. Due to mental illness & health constraints I am not able to work and now I am taking rest at home. Which means that myself & my wife are both unemployed and totally depending on the interest income. For convenience we have funds parked in our Joint Account.

I have the following questions:

1) My wife can gift back (portion or total) of original amount (i.e. 30 Lakhs) which I gifted her 6 years ago?

I want to keep the tax-exempted interest (15 Lacs) with my wife and keep portion or full original amount (30 Lacs) on my name so that she can develop her own corpus funds so that she is also happy. Any Interest she earns on this interest income will be hers and taxable in her hands. Is that true? Pls Advice

2) Can she gift to me the tax exempted RBI bond interest income received by her (i.e. 15 Lakhs) ?

3) As I am not doing good in my health, I want FD on my name as a future security. Because of my ill-health I am worried about my security now. Kindly advice me with respect to income tax.

4) Once that amount gifted to wife, whether the gift can be taken back? I read in one site that gifts cannot be taken back one gifted to wife. Is that true? If that is the case then can I take back the full or portion of Principal and Interest amount? Pls Advice.

5) Taking back the original gifted amount and leaving the Interest income with my wife is permissible by Income Tax? Because we both need not pay tax on this by doing this way. Is not this a tax evasion? Pls advice.

6) Please suggest me the best way to save tax and also I get a sort of financial security from the total capital.

You can gift money to spouse anytime and spouse can give you gift anytime. So if you gifted some money to spouse and spouse gifts it back to you not an issue.

You can loan the money to spouse anytime and spouse can return the loan anytime not an issue.

You cannot "take back" a gift. If spouse gifts the money back, that is fine. But if you want to "take back" a gift, then technically that was not a gift. For an amount given to be classified as a gift, it has to be unecumbered, unconditional and irrevocable. By "asking back" the "gift", it is not a gift but a loan.

Now, the issue is not of gifting as much as income clubbing.

If a spouse gives monetary gift to the other spouse then the income derived has to be clubbed with the income of the spouse giving the gift. However, your income derived was a tax exempt interest and if clubbed with yours, nothing changes to your taxes because of it being tax exempt, then that becomes not too big an issue. What about the income recieved and the interest on earned on the received income - who paid the taxes. That income was technically your income because of clubbing and not spouse income and any interest on that interest taxable to you.

Following link may help further - http://www.moneycontrol.com/news/tax-expert/findingway-around-taxclubbingincome_210421.html

A good local CPA might be a good idea for you.

Thanks for your inputs.

Now the total corpus is parked in Joint Savings Account. Out of which 51.72 Lacs was gifted to her 7 years ago by me when we both were in USA as NRIs. 26.19 Lacs is the RBI interest income which is totally tax exempt earned by my wife. Though the money was mine, RBI bond was totally on her name with single mode of operation.

A) Total amount originally gifted to her 7 years ago when we both were in USA as NRIs=51.72 Lacs INR
B) Total Tax Exempt interest income earned by my wife from RBI Bonds (totally on her name)= 26.19 Lacs
C) of (B) above, interest income clubbed in my hands as Donor = 21.54 Lacs
D) of (B) above, cumulative interest earned by my wife as Donee (income on income calculated by MS Excel)= 4.65 Lacs.
Income earned on the Interest Income will be taxed in my wife hands. This is also Tax Exempt.

All the amount is parked in Joint Savings Account.

I am now unemployed and shall remain same for next 2 years as I got a bypass surgery. My wife is also unemployed as she is a house wife. As we both are UNEMPLOYED, We both want to live on the interest earned by the above corpus for some time.

Please advice me how to split the total corpus so that we both can show the interest income that is going to be earned in future as the minimum taxable income.

Kindly Advice.

RRK, Rajesh Dhruva and other experts, I also request you to share your inputs.

Srikanth

Dear Rajesh,

Many thanks for your reply.

I want to keep you posted that I have emailed you an attachment mentioning various aspects for clarity. You may kindly read the attachment and reply for the same on 12th w.r.t. tax planning & clubbing of income so that myself and my wife take the interest income without paying any tax.

Once again many thanks for your prompt response.

Srikanth

Dear Nsrikanth,

1. Principal amount of say Rs. 5 mn has been gifted by you to your wife while both of you were in USA, prior to her return to India in 2000 for settlement.
2. Amounts gifted by you to your wife attract the clubbing provisions of Section 64 (iv) of the Income Tax Act, 1961 [IT Act] which provides for inclusion/clubbing of income of the individual any income arising to a spouse from any assets / funds transferred by the individual to spouse.
3. As amount of gift was invested in tax-free Reserve Bank of India (RBI) bonds, all the interest income will be clubbed in your income but being exempt from tax, the same will not attract any taxation.
.02 Thus, although total interest of Rs. 2.5 mn will attract clubbing provisions but being exempt will not attract any tax in your personal status.
.03 Although the principal amount has been gifted , said interest of RBI Bonds of Rs. 2.5 mn belongs to your wife and as such the same forms part of her independent capital.
4. Interest earned on the interest income i.e. cumulative interest will be treated as a personal income of your wife. Thus, if Rs. 0.5 mn is the amount of accumulated interest, then the same is to be treated as her personal income.
5. If your wife has earned income in USA and also made household savings say for eg. US$ 1000 per month and if such amount totals to say Rs. 1 mn during her stay in USA said Rs. 1 mn- out of the gift amount of Rs. 5 mn being her own capital, will not attract clubbing provisions.
.02 Under the circumstances, your wife will have personal wealth of say Rs. 1 mn of savings and personal income in USA which enhanced by interest income of app. Rs. 2.5 mn will total up to Rs. 3.5 mn.
.03 On the other hand, Rs. 1 mn reduced from your gift amount of Rs. 5 mn will leave a balance of Rs. 4 mn being amount of gift given by you.
6. Ideally, your wife should not gift back as otherwise the original gift will amount to a sham and unfair practice to create her capital by way of tax-free income.
.02 Such reverse gift will also bring to fore complexity of cross clubbing i.e. principal amount of Rs. 5 mn earning income in her case being clubbed in your income and thereafter reverse gift of Rs. 5 mn- by your wife to you attracting clubbing provisions in the hands of your wife.
7. As mentioned hereinabove, gifts and reverse / cross gifts are not advisable.
.02 We can do legal planning for retaining part of the wealth in your name and balance in the name of your wife which will secure independent income for both of you.
8. There are no restrictions for amounts of gifts being regifted but this will open Pandora's box of complexities.
9. Reverse gifts of any amount is not advisable.
10. If your wife has received gifts from her parents and brother, an appropriate division of wealth should be done keeping such amounts while computing the revision.
11. Gifts received by way of say bank deposits by your wife from her father or brother will not attract income tax provisions of Section 56 (vii) of the ITAct and as such will not be liable to income tax in her hands.
.02 Similarly, if you received gifts of bank deposits from your mother or in-laws, the same will not attract any adverse tax provisions or tax liability.
12. Division of your wealth legally and independently should be worked out which requires examination of detailed facts and applicable provisions of Tax Laws .
.02 Said facts and legal tax and FEMA planning cannot be discussed in finer details in any Public Forum and may be exchanged at personal emails

Best wishes
RAJESH H DHRUVA \
Note : the facts are based on personal email recd.