A growing number of taxpayers, especially those in higher income brackets, now try to reduce their tax burden by shifting money to family members. The idea seems simple: move funds to someone in a lower tax slab, let them invest the money, and enjoy lower taxes on the returns. Many people see this as an easy extension of traditional tax-saving strategies. But the truth is far more complicated.
In many households, this approach takes the form of gifting money to a spouse, helping a parent, or providing a lump sum to an adult child who has little or no income. At first glance, the strategy looks efficient. After all, transferring money to a family member is completely legal, and gifts to relatives are not taxed.
However, tax law does not allow such transfers to automatically reduce the giver’s tax liability. The intention behind the transfer — especially if it appears to be purely for tax saving — matters more than many people assume.
India’s tax system includes a set of “clubbing” rules designed to prevent taxpayers from shifting income to relatives just to reduce their own taxes. Under these rules, if someone transfers an asset to a close relative without any consideration, the income earned from that asset can still be taxed in the hands of the person who originally transferred it.
So, even if money is moved to a family member, the tax advantage may disappear if the income from that money legally belongs to the original giver. This is where many people misunderstand the rules and end up disappointed.
There are, however, situations where gifting money does lead to legitimate tax savings.
For example, if money is gifted to an adult child, and the child invests it independently, the income from that investment is taxed in the child’s hands. Since an adult child has their own basic exemption limit, small investment returns may fall within that limit and remain tax-free.
This works because clubbing rules do not apply to adult children.
The situation is very different for minors. When the recipient is a minor child, the income from the gifted funds is usually added to the parent’s income and taxed at the parent’s slab rate — unless the money was gifted by a grandparent or certain other relatives.
The rules also come into play for married couples. If a spouse invests gifted money and earns returns, the resulting income is typically clubbed back with the income of the spouse who made the gift.
The definition is broad but specific. Relatives include spouse, parents, siblings, grandparents, children, grandchildren and spouses of these family members
Gifts to these relatives are not taxable, regardless of the amount. But gifting to non-relatives has limits. If the total value of such gifts crosses ₹50,000 in a financial year, the entire amount becomes taxable for the receiver as income from other sources.
There is no legal cap on how much money can be gifted to a relative, as long as the transfer is genuine, documented and not linked to tax evasion or artificial arrangements. Many people gift large sums during life events, such as marriages, property purchases or financial planning for children. But the intention behind the gift, and the way the money is later used, must be clear.
When large sums move within a family, the tax department often looks closely at the trail. Transfers that appear suspicious, attempt to turn unaccounted money into legitimate funds, or lack supporting documents can easily attract scrutiny.
For that reason, maintaining proper paperwork is vital. Tax professionals routinely advise families to keep:
(i) a simple gift deed stating the purpose of the transfer
(ii) bank records showing where the money came from and where it went
(iii) proof of identity and relationship
(iv) investment records, if the money is later invested
(v) written explanations for large transfers, especially during audits
Cash transfers are particularly risky because they leave no clean trail. A bank transfer is the safer option, and registered deeds are recommended when gifting immovable property.
Transferring money within the family is completely legal and very common. But when used as a tax-saving trick, it requires a clear understanding of clubbing rules, tax limits and documentation. A well-planned, well-documented gift can certainly help with tax efficiency in some situations, especially with adult children. But a poorly planned transfer can easily lead to more questions than answers.
The safest approach, as tax practitioners often note, is simple: keep everything transparent, use bank channels, document the intention clearly, and avoid shortcuts that could later be interpreted as attempts to hide income.