Precautions In Gift Tax In India

1. Some persons carefully choose cumulative schemes like the 3-year Co-FDs for a child of over 15 years of age, 6 year NSC-VIII for over 12 years, etc. They are under the mistaken notion that the cumulative interest received after the child becomes major will escape clubbing. Interest on these schemes, though paid at the end of their term, accrues on yearly basis and is brought under the ambit of income tax by section 5 of Income Tax Act.
2. There are couples that have taken a divorce just to bypass the clubbing provision and are staying happily together.
3. Husbands may give gifts, out of natural love and affection, to someone else’s wife and vice versa. Utmost care is taken to ensure that husband of the donee does not give a gift to donor’s wife. A different wife is selected every year for the favors. Such cross gifts are not permitted by the Act. However, such unscrupulous characters take advantage of the loopholes and may get away with it.

Seepage turned into deluge.
Deletion of Gift Tax Act has opened floodgates for litigation. Determining whether a transaction is a genuine gift or not would be at the discretion of the Income Tax Office. Obviously donor-donee relationship, financial ability of the donor, justification for giving the gift, etc., have suddenly become paramount parameters. These are essentially subjective in nature. Yes, abolishing gift tax is an excellent idea but not before the infrastructure handling our premier tax legislation as well as the judiciary system is in its right place. These should be so strong that it would be difficult to get away with any tax evasion by adopting gifts and the consequent Inspector. Without this we will have many persons accepting income against goods and services as gift forcing the legislation to be rolled back. To avoid this, it may be a good idea to convert the 1-by-6 scheme into 1-by-7 compelling the donor as well as the donee file returns.