Diwali is often a time when families make big purchases and help each other meet important financial goals. For parents, this could mean contributing towards their children’s first home by helping them arrange the down payment. A gift of Rs 10 lakh or Rs 20 lakh may seem like a straightforward transfer within the family, but it is important to keep the right paperwork in place.
While money received from parents as a gift is generally exempt from income tax, maintaining proper records of the transaction can help avoid questions about the source of funds at a later stage.
Is money received from parents taxable?
Under the Income Tax Act, gifts received from specified relatives, including parents, are exempt from tax, irrespective of the amount. The exemption is not subject to the Rs 50,000 limit that applies to certain gifts received from non-relatives.
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For instance, if a father transfers Rs 15 lakh to his child’s bank account to help fund the purchase of a flat, the amount is not taxable as income in the child’s hands, provided it is a genuine gift.
What documents should you keep when receiving the money?
Even though the gift itself is tax-free, it is important to have records that establish where the money came from and why it was transferred. A bank statement alone may not always be sufficient to explain the nature of a large transaction.
Parents can provide a gift deed or a signed gift letter mentioning the amount, date of transfer and the fact that the money is being given voluntarily, without any expectation of repayment.
Homebuyers should also keep the following documents handy:
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Bank statements: Records showing the transfer from the parent’s bank account to the child’s account.
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Gift deed or letter: A signed document confirming that the amount is a voluntary gift and not a loan.
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Proof of source of funds: Documents showing how the parents accumulated the money, such as savings records or investment redemption statements.
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Property documents: The sale agreement and payment receipts showing how the gifted amount was used towards the home purchase.
Transferring the money through banking channels rather than in cash also creates a clear financial trail and makes it easier to establish the source of funds if questions arise.
Are there any additional costs or tax implications?
A genuine monetary gift from parents does not attract income tax in the hands of the recipient. However, there are a few other aspects that families should keep in mind.
If parents borrow money to make the gift, the responsibility for repaying the loan and servicing the interest remains with them.
The tax treatment may also change once the recipient puts the gifted money to use. For instance, if the amount is invested in a fixed deposit or mutual fund, the returns may be taxable, depending on the nature of the investment and applicable tax rules. Similarly, rental income earned from a property purchased using the gifted amount is generally taxable in the owner’s hands.
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The homebuyer will also have to pay applicable stamp duty and registration charges, which vary from state to state.
A parent’s contribution towards a child’s first home can go a long way in easing the financial burden of a property purchase. However, families should ensure that the transfer is properly documented. Keeping a gift deed, bank records and proof of the source of funds can help avoid unnecessary tax-related complications later.
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