Invested my retirement funds in relatives’ fixed deposits. Do I need gift deeds? Will I face tax?

It is very common for retirees to gift or park their retirement funds in deposit accounts of their close relatives. Should such transactions be recorded in gift deeds? And, what happens to taxation when such deposits earn interest? Do they get clubbed with the income of the retiree for taxation? Today's Q&A answers these in response to a reader's query.

Under the Indian Contract Act, a gift transaction is completed when the gift is accepted by the donee.

For movable assets, no documentation is mandated. However, it is advisable to have a written communication recording your offer to make the gift and acceptance of the gift, signed by you and by the respective parties.

Please note that the offer of the gift and its acceptance need not necessarily be in writing. Acceptance of gifts can also be communicated through the conduct of the parties. There is no need for you to use stamp paper for this purpose. Such communication on plain paper is sufficient.

As a general rule, if the aggregate of gifts received during a financial year from all sources exceeds ₹50,000 in value, it is treated as income of the recipient. But gifts received from specified relatives are not treated as income of the recipient. Brothers and maternal uncles are covered in the definition of specified relatives. Therefore, there is no tax implication at the time of making the gift for you, your sisters or nephews.

As far as the applicability of the clubbing provisions is concerned, there will be no clubbing for the interest earned by your sisters. However, interest earned by the nephews will be clubbed with the income of the parent with the higher income if the nephews are minors.

In case nephews are adults, no clubbing provisions will apply. In any case, interest earned by your nephews will not be clubbed with your income in either situations.