RSU, ESPP and ESOP – Understanding Meaning and Taxation

Most of the people who join their first job,  get benefits like RSU, ESOP and ESPP as part of their CTC package (infact this is how employers show a high CTC while recruiting).However most of the employees do not understand these things in the beginning. Over the next few months, they start getting some knowledge about these benefits as employee.

A lot of people confuse these 3 things with each other and often do not have a full understanding of what they mean and how they work and what are the tax implications when they exercise their benefits.We will now take each one of these and understand them.

employee benefits RSU ESOP ESPP India

In this articles lets understand all these 3 things – RSU , ESOP and ESPP in detail.

1. RSU (Restricted Stock Units)ESOP

RSU or Restricted Stocks units are very simple to understand. The Company gives company Stock to an employee without any conditions, however there is a vesting period involved. Vesting Period is the tenure for which you will have to wait, before you can claim those shares. So if a company gives you 100 RSU vesting in 2 yrs. That simply means that after 2 yrs, you will get 100 stocks of the company. It will be all yours and you are free to keep them or sell them after that. RSU’s are also a great way to reward the employees, like in 2012 WIPRO awarded 4.5 million RSU’s to its 1200 employees (mostly top management).

RSU’s are a great way to make sure that the employee stays with the employer for long term. Imagine a company, who gives 1000 RSU’s vesting in 4 yrs. An employee will thinking many times before changing his job, because if he leaves the job and moves to another company, then he will loose those RSU’s, which might be worth a lot of money depending on the stock price. I had myself got RSUs from Yahoo, when I joined them, but due to their declining stock price over so many years, RSUs were not a great motivator for me. It was just a bonus amount for myself.

RSU can also be given in phased manner sometimes, like 25% RSU each year. So if company is giving 100 RSU’s with condition of 25% RSU vesting each year, then 25 shares will vest in first year, then another 25% in 2nd year and like this, only after 4th year, an employee will be able to get all 100 stocks.

Its worth noting that if you leave a job, a lot of companies require you to sell your RSU’s in next few months. for example next 3 months.

2. ESOP (Employee Stock Options)

Employee Stock Options or ESOP are generally given by most of the big companies in India, especially IT companies which are listed outside India. ESOPs are nothing but “OPTIONS”, which are also in stock market in India (remember Future & Options?)

Let me tell you what Stock Options are in general. If a person has a Stock Option, he actually has a right to BUY a stock in future at a pre-decided price agreed at the time of giving those stock options. So in future whatever is the market price does not matter, you always have an option to buy it at the price which was agreed upon. In this case if market price of the stock is above the pre-decided price, then you can just exercise your options of buying the stock and instantly you will be in profit. If however, the current market price is less than the pre-decided price, then you choose not to exercise the stock option at all and nothing happens.

Let me give you an example. Let’s say that an employee joins a company on 1st Jan 2013. His company gives him 500 ESOPs with vesting period of 3 yrs and at the vesting price of Rs 200. What this means is that his vesting date is 1st Jan 2016 (after 3 yrs) , On that date, he has a OPTION to buy 500 stocks of the company at Rs 200 if he wishes. Now lets say on 1st Jan 2016 …

Case 1 – The stock price is Rs 800

In this case, the employee can exercise his option and he can get 500 stocks at only Rs 200 . At this moment, the employee will make a clean profit of Rs 600 each shares and a cool Rs 3,00,000 . Note that he does not have to pay anything here, when he exercises his option, he will automatically get his profit without putting anything from his pocket. It makes sense to exercise his option in this case, because vesting price is less than market price.

Case 2 – The stock price is Rs 130

In this case, it does not make any sense to exercise, because you will be in loss, because the price you have to pay is less than market price, so you let this option go.

Note : In case of stock options, you can never make any loss, it will always be some profit only.

3. ESPP (Employee Share Purchase Plan)

ESPP or Employee Share Purchase Plan is a benefit given by employer to its employees to purchase the stock of the company at a discounted price. In an ESPP plan, an employee has to contribute a part of this salary in ESPP plan each month. An employee can choose how much of his salary he wants to contribute by himself. It can range from 1% to 15% of his salary. All the money which he contributes gets accumulated for few months and then in one go, stocks are purchased for him at some discounted price. On what price the discount will be given depends on your company EPSS plan. However in general its the minimum of the prices in the start of the EPSS plan and at the end of the ESPP plan. Let me give you an example.

Suppose your company offers a ESPP plan twice a year which you can opt for, one window opens is Jan-June (where you can join in Jan only) and other is July to Dec (You can join in July only). So you will have to tell the company how much you want to contribute each month before hand. If you choose it to be 10% , then 10% of your salary will be cut for ESPP plan and you will get the rest in your hand.

Now suppose a person chooses Jan-June window and he is contributing 10,000 a month for this, then in next 6 months, he will accumulate Rs 60,000 for ESPP, and now at the end of the Plan he will be able to get the shares.

What will be the share price considered for him ? 

Let’s say that the stock price in the start of the plan (Jan month) was Rs 100 and the stock price at the end of the plan (June) was Rs 120. Then the stock price considered for him will be minimum of 100 and 120 , which is Rs 100 and on this he will get 15% additional discount and his final price would be Rs 85 only.

Note that this example is assuming that minimum of two is taken , your company EPSS might just consider the “starting price” or “ending price” .. So please look at your company EPSS plan in detail.

When to choose ESPP plan ?

ESPP is a great way to get the stock price at discount, but one should anyways take care of few things. If company’s future prospects look great in future, then one should buy the stocks anyway, so ESPP becomes a great deal where you sure shot get 15% discount. However if company’s prospects look bad in future, then you have to figure out if it’d make any sense to go for ESPP plan or  make a better use of your money elsewhere.

Below is a video from Salesforce which explains their ESPP plan, watch it to get a feel of how EPSS works ?


Taxation on RSU, ESOPs and ESPP

The taxation for RSU, ESOP’s and ESPP is governed by same rules, as all of them have to deal with stocks which a employee acquires and the taxation is pretty simple to understand. There are just two rules.

Tax to be paid in India

When you sell the your RSU/ESOP/ESPP (after vesting period is over) and get back the money, its your responsibility to pay the tax on the amount in India. How much tax is to be paid by you, depends on the nature of the gains. If you sell the shares before 1 year of acquiring the shares, then the gains are called Short Term Capital Gains (STCG) and if you sell the shares after 1 year, then the gains will logically be Long Term Capital Gains.

If stocks are listed in indian stock exchanges, then you have just have to pay 15% tax on Short Term Capital Gains and no tax on long term capital gains. However if stocks are not listed on indian stock exchanges, but some foreign country, then you will have to add the short term capital gains tax in your income and pay tax as per your slab rate, and 20% with indexation on the long term capital gains, which is the case when STT is not paid when the transaction is done.

Below is the simple table which will explain things to you


Listed/Gain-Type Short Term Capital Gain (Less than 1 yr) Long Term Capital Gain (More than 1 yr)
Stocks Listed on Indian Stock Exchange 15% Tax on Profits No Tax
Stocks NOT  Listed on Indian Stock Exchange Profits will be treated as your Income and taxed as per your Slab 20% with Indexation


Incase Stocks are listed on Foreign Stock Exchange

In these cases, it might happen that when you sell your RSU, ESOP’s or ESPP, the tax is directly cut by the trading portal like etrade (in US) and you only get reduced number of units (after tax). After that when you take the money back in India, you might have to pay the tax on the income again if the double tax treaty is not available with that country.

I hope, you got a lot of clarity about RSU (Restricted Stock Units), ESOPs (Employee Stock Options) , ESPP (Employee Share Purchase Plan). These are some of the benefits employees get and understanding them is very critical for them. Please share if you have any of these benefits and if you had any confusion around them?

Do not close your Loans – If you want to improve your credit score!

Do you have a loan and want to close it as soon as possible? I know the answer is YES! . Everybody wants to get rid of debt and want to enjoy a debt free life. But, what if I give you a good enough reason to not close your loan and keep paying your EMI on time? And if I suggest you do that even if you have a lot of spare cash which you can use for paying of the loan. Lets see …

Improve your Credit Score - Do not close Loan

There are many people who are paying their previous loans, but when they apply for some new loan, its getting rejected because they have some bad credit record in past either due to settlement of some debt or because they have a bad payment record. This creates a very frustrating atmosphere, where you want to do something which you instantly make you a “good” customer. A big myth people have is that just because they have a loan going on, they are having a bad credit score, and because of this myth, they want to close off their existing loan.

However this is not true! Let’s see an incident which happened with Nagarajan

I was holding two home loans since 2000. I am a well paid professional drawing good salary, however due to frequent transfers my Post dated cheques were not replenished resulting in non-payment for over 6 months, Also due to some signature error a few times, cheque bounces happened, but they were repaid and corrected .

I dont posses any credit card. only debit cards were used regularly for any financial transactions. 6 months back a personal loan enquiry got rejected due to very bad credit score ( 450 only). so immediately I wound up all the loans ( 4 months ago). now I am loan free and no credit card holder. how long will it take to recover my credit scores ?

You would see how Nagarajan closed his loan thinking that his loan eligibility would increase because his credit score will improve. However what he did was totally wrong and the right thing was to just continue paying his existing loan. Lets see why.

Paying EMI regularly is a Opportunity to show your repayment capability

If you look a little deeper, you’d realize that your existing EMI payment is one of the only ways you can showcase your repayment capability. When you make EMI payment on time, this information is updated to credit bureau (CIBIL etc) by your existing lender and if done on a regular basis, it affects your credit score in positive way and also improves your credit report . Your Days Past Due (DPD) section in CIBIL report also gets positive because your recent information for last 36 months is there in the credit report.

So now I hope you are clear about the importance of paying your EMI on time on regular basis. Its one of the only ways you can build your repayment record and improve your credit score. Do you have a credit card or some kind of loan? If yes, then it might make sense to keep paying their dues on time just for making sure that you build your repayment history!

Can you share some thing related to this from your financial life ?

Mistake in your Medical report while taking Term Plan – Real Life Experience

What happens when your hospital goofs up and your term plan premium goes up because of that mistake? When you take a term plan, the insurance company either asks you to take up medical test in some hospital or a doctor comes to your home and does the checkup. Things mostly go well and at times some kind of health issue comes up, and you say

“Ahh … you say, I didn’t know there was this issue, Thank God! a medical test was done.”

Then the insurance company increases the premium because there was some issue in your medical report. You pay the increased premium, feeling secure now that things are black and white. But, what if the medical report was wrong because of some mistake the hospital made? What if there was a TYPING Error? Yes! It happens and we have a real life experience today.

wrong medical report term insurance plan

Nitin shared his experience on our Question and Answer forum while buying his term plan from HDFC and Aviva. Below are his experiences

Experience while buying HDFC Click2Protect

After some analysis I found below 2 plans suitable for my term insurance needs: [list style=”check”]

  • HDFC Click2Protect
  • AVIVA i-Life

After considering some factors, I had chosen HDFC Click2Protect and applied for it. My medical test has been performed in 4-5 days. Few days later I got notification from HDFC that my proposal is postponed because of ‘elevated level in my blood sugar’. It was a shocking news for me because I am a healthy person and never had any problem (touch wood). I called hospital people (where my medical check-up was conducted) and after request they informed me that my sugar level count is 173 (normally it should be between 70-100). I still not believed that and went for medical check-up again by myself and found sugar level count is 72(which is normal).

Then I decided to go for AVIVA i-life plan and applied for the policy. Fortunately/Unfortunately, my medical examination was scheduled at same hospital, where it was conducted before for HDFC. This time I carried my medical report (which I had done by myself) and asked hospital about the reason for differences in both reports. According to their report my count was 173 & according to my report count was 75. They checked again and found that it was a TYPING MISTAKE, actual count was 73 but they wrote it 173 by mistake.

Now, because of this mistake HDFC postponed my application & also my insurance records gets affected. Hospital GM apologies for the mistake and sent clarification note to HDFC about the mistake. Currently, my AVIVA application is under processing.

Lesson Learnt & Message DON’t trust on any medical report if it looks surprised for you. Please double check it with multiple doctors or Hospital if you think it is not correct and challenge it.

After this incident, he went for Aviva Term plan and the same kind of issue happened this time also. Below is the experience.

Experience while buying Aviva Term Plan

My medical examination for AVIVA ilife plan happened in same hospital (where I had for HDFC C2P plan). After few days, I got information from AVIVA that they have raised my premium by 50% because of ‘Increased liver enzymes’ in my body and waiting for the balance payment to issue a policy. It’s again a shocking news for me, since I didn’t expect it this time. But the good thing is that AVIVA has shared my medical report with me. I checked with 2-3 doctors about my report and according to them this increase in liver enzymes is possible for those people who drink alcohol or having fever in last 1 months.

But for my case, I don’t take alcohol nor having any fever in last months, so doctor suspect that this time also report may be not correct. So again, I went for a medical test (only for Liver part this time) by myself and found that my liver report is NORMAL (as expected). I informed AVIVA about the same and also shared my Normal medical report. After 2-3 days, finally got mail today that they have issued my policy without any extra premium. Hmmmmm……buying a online term insurance looks like winning a war for me.

Important Points Regarding Medical Tests

  • Make sure you do minimum 12 hours of Fast before the medical tests
  • After doing the medical tests, check if you can get the medical test copies or at least the results
  • For any point you are concerned about, better take a second opinion from another clinic
  • If possible, go for medical tests once again at your own cost to double check if you suspect anything

Did you double check your medical reports which you did for your term plan or health insurance plan? If not, its time to just have a second look and check if you are fine with it.

Simple vs Complex Financial Products – Which are more powerful ?

I was talking to one of my distant relatives and told him this – “When you want to increase sales of a financial product, make it complex, and if you want sales to boost a bit more, increase the complexity a bit more!”. Because the moment a financial product is “complex”, investors perceive them to be more valuable and worth investing. When a product is simple, it does not look powerful to them. Let me break this myth to you today.

If you look at any financial product, it will either be simple product or a complex product. Let’s see what they are

Simple vs Complex Financial  Products

1. Simple Products

Simple Products are those which are very very focused, with one intention and true to focus, they are easy to understand. Some examples are Fixed Deposits, Term Insurance, Mutual Funds, Health Insurance, Motor Insurance, Recurring Deposits, Govt Bonds etc.

2. Complex Products 

Complex products on the other hand are those kind of financial products, which are built by combining two or more Simple products functionalities. Some of the examples are ULIPs, Endowment or Money-back plans, Fixed Maturity Plans, Child Plans , ULHP (unit linked health plans) etc. You will see that its much easier to sell complex products because they offer more than one feature and people feel that they are such an excellent products with some magic, but the truth is that they just have features of more than one Simple product.

For example if you take a ULIP, its just offers the functionality of term insurance and mutual funds. You can get life cover and also enjoy market linked investments, & just like that a endowment plan or money-back plan also offers the functionality of a term plan and a bond.

Simple Products are Powerful

If you have been a regular reader of this blog from some years, you would have realized by now that simple is powerful and that holds true for financial products also. All you need are simple things like a term plan, a health insurance policy, a SIP in mutual funds and an emergency fund and you are pretty much have completed your financial planning. You don’t need much more than these simple products. In my 1st book – “16 personal finance principles every investor should know” , I have stressed upon several simple concepts, which will how you how easy is the game of personal finance.

Complex Products have high CHARGES

I am not commenting on the usefulness of complex products, because they can also offer a great way of investing your money, but the one thing that’s really clear is that a complex product can charge higher fees just because someone has taken the pain of creating those complex products. Now because customers feel they are special, they will also be ready to pay high fees … and that’s exactly what happens. When you perceive something as powerful (complex seems to be powerful to many), you will be more ready to pay higher fees.

Do not look beyond Simple Products

For a common investor, I would say that most of the times Simple products are enough. When they come across a financial product, they should see how simple it is and what core functionality it provides. If it tries to do a lot of things and you are lost in its features, its probably a time to say NO to it and move on.

A lot of people have created more wealth by wrongly investing in Simple products that those who correctly invested in complex products. A simple law of Design is that “simple is powerful” and it’s true for most everywhere, including personal finance.that this article does not mean to say that all the complex products are bad and are not worth looking, we are just talking about a general principle!

What do you think about this simple principle and do you also observe the same thing?

CIBIL marketplace – Get Customised loan offers based your credit score

CIBIL has introduced a new facility called “Cibil Marketplace“, which will act like a portal where a person can get customized loan and credit card offers based on his cibil score. Right now, what happens is – when a person applies for some kind of loan or a credit card, the lending institution checks his credit report and credit score and based on their internal criteria and rules, reject or accept the application and move to the next step .

cibil marketplace enter data

How does CIBIL marketplace work?

With CIBIL marketplace, the whole process is reversed. Here, you can find out which lending institutions are ready to give you different kind of loans, interest rates and other conditions based on your credit score. So a lot of lenders will participate in the cibil marketplace and will give their criteria and checklist, like what kind of customer they would like to offer loans. For example – A lender can say that they are ready to give Car loan @13% interest rate to a person having cibil score between 700-800 and @12% if cibil score is more than 800 . Thats one example .

Another lender can say that he is ready to give home loan to people who have credit score below 700 score, but on a condition that he should be working in a software job, however the interest rate would be as high as 15% – this is just an example of how it might look like. So this is how all the lenders will give their own criteria and when you enter the market place, after the filtering you will be shown only those lenders and loan offers which are exactly for your profile. So if you want to increase the number of loan offers, you need to improve your cibil score for that.

Right now the CIBIL marketplace is started with only Credit Cards. But very soon, you will see Home loans, Auto Loans, Personal Loans and even Business Loans on the portal. Just wait for some time or the next update from CIBIL on this.

How to Apply for Loan with CIBIL marketplace ?

Step 1 : You need to first visit Cibil Marketplace website. When you go there you need to fill in two information.

Step 2 : You need to enter your Control Number (which is 9 digit number that is mentioned at the top right of the CIBIL report) and your latest Credit Score, which should be maximum 2 months old. That means, if you had applied for a credit score long back (more than 2 months back) , you will not be able to use that data to enter CIBIL marketplace. You will first have to apply for a latest cibil score (You can get your cibil score online) and only then you will be able to enter the marketplace. One reason for this is that, cibil score and report keeps getting changed each month when banks update the customers information with CIBIL. So ideally if you know control number and cibil score of some other person, you can enter the cibil marketplace with that information and see all the data . Therefore make sure you dont share this data with anyone whom you dont rely.

cibil marketplace enter data

Step 3 : The next step is to go inside the marketplace. You can see different kind of loans section and how many lenders are ready to lend you in each section. For example you can see that only 1 lender is interested to lend in this example and that’s “credit card” section . As of now, only credit cards are offered as this is new facility. But in future you can see more lenders in different sections. All you need to do here is click on the kind of loan you want.

cibil marketplace enter data

Step 4 : After you choose the section, you can see the list of all the lenders individually with some information like Tentative Credit Limit offer, interest rate, fees, charges and other information. You can click on “Apply” button and instantly a small box will appear where you can apply for the loan there itself. Now this will be a kind of pre-approved loan because this is customized to your cibil score, but the next step will be the documentation check, which is part of the check in general . For those who would like to learn more about CIBIL and Credit Score etc, there is a detailed 40 min video course on our Wealth Club.

cibil marketplace enter data

So these are the 4 steps you need to do to take the benefit of CIBIL marketplace.

Few Important Points related to Cibil MarketPlace

  • You can choose only one offer in each category
  • While purchasing your CIBIL TransUnion Score (and CIR), please make sure you fill up your income details accurately. As this will ensure the offers that are displayed in your Market Place are the ones you are eligible for. Any incorrect income detail will mean incorrect offer eligibility and can be rejected by the lender at the time of verification.
  • It also depends how many lenders choose to participate in CIBIL marketplace. There might be lenders who choose not to.
  • Once you have selected an offer then the respective lender will get in touch with you. Please ensure the details entered by you in the CIBIL TransUnion Score (including CIR) purchase form is accurate. This will enable the lender to respond to you at the earliest. You can also provide alternate contact details while selecting and confirming the offer in the CIBIL Market Place.

Who will benefit with Cibil Marketplace ?

CIBIL marketplace is an innovative platform and will also be helpful to those people who have low cibil score and a bad credit report , but still want to go for some kind of loan, even if it means on certain terms and conditions. It may be the case that they might pay a little more interest, but that would be better than not getting loan at all. This platform might also be the first step in providing incentive to those customers who have excellent cibil score. They might get loads of loan offers from lenders with lower interest rates compared to normal customer. Only the time will tell how this platform will evolve.

Let us know what do think about CIBIL marketplace and is it useful for you ?

Envelope budgeting system – A simple way to control your expenses

Some months back, when we were working with a Mumbai based client of ours, we noticed that one of his expenses of “Eating Out” was extremely huge. Their explanation was they were never able to control the number of times they went out. So we thought how about limiting the amount spent somehow ?

Envelope budgeting system

Today I am going to share Let me share with you all a simple and effective budgeting system which has been in use for centuries – worldwide! . It’s called the “Envelope Budgeting system”.

The common problem across families is that they keep spending money on various things from a single card or pool of money. The basic idea here, with this system is to label your different expenses, categorize them if you will,  and keep an envelope with money dedicated to that category, in it.

When you need to spend on a category, voilà, you take the CASH for its respective envelope and spend. Let me give an example. Suppose your expenses are as below.


RENT Rs 10,000
GROCERY Rs 6,000
VEG+MILK Rs 3,000
BILLS Rs 3,000
MISC Rs 1,000
Total Rs 25,000


envelope budgeting system

5 Simple points regarding Envelope Budgeting System

1. Once it’s gone, it’s gone

When you take some money out of an envelope, and spend it, it’s gone! You will be left with some remaining amount for that particular month. Now all you have to spend that month is the leftover. So spend it wisely.

If you still want only spend more than what the envelope contains, you just break the system. Better stop following it then. It’s not for you :)

2. Don’t transfer between envelopes

Just because you have some money left in some category, does not mean you can spend it on another category. This system is all about controlling your expenses in individual categories. Whatever is left in some envelope should go to your investments. It’s like a bonus leftover.

3. If you fail to follow, invest 10x the amount as penalty

It’s human to fall off the wagon. At times you will deviate from the plan and spend more money other than you allocated. In this case, you should penalize yourself for breaking the rule, by investing 10x the extra amount into some investments. For example, you have Rs 3,000 allocated to “Eating Out”  you spend Rs 5,000 in a month. Then you are using an extra Rs 2,000. You should penalize yourself by investing Rs 20,000 (10 times) in some thing to offset this crime. This will be a good spin on just desserts!.

4. Emergency expenses, but settle later

Ideally your expenses should be planned and the money should come from the envelope, but you will have to spend sometimes on your credit/debit card (read various credit card cashback offers), which is fine at times, but make sure you settle things back when you are back at home.

5. Guilt-free shopping

The thing I like about the envelope budgeting system is the “guilt free spending.” Once you have allocated the money to different categories, then you can spend up to the limit, without thinking much. That’s the best part.

TIP : Libin informed me in comments section that there is an Android app called Easy Envelope Budget Aid (EEBA) for this envelope system ! ..

Real life examples of its Effectiveness

Harpreet shares

I feel so proud to say that I follow this system.

Yes, many times I feel bound but I know what I have got by following this system. Be it getting rid of a loan (worth Rs.2 lacs), renovation of my home (worth Rs.2.5 lacs), be it car (Alto), money for Jewelry (worth Rs.1.5 lakhs), 40 k cash as gift to near & dear ones in a span of 6 years. Right now I am saving for my daughter’s school admission.

I agree that I never spent for grocery, maid salary & rent being in a joint family but still I wonder that I was able to achieve these targets when my present salary is just around 26k and when I started following this system 5 years back, it was much less.

I started this as I had no choice, but believe me I am now addicted to this system.

It’s not for everyone

A lot of people use this envelope system and are pretty successful in following it for months and years. However many people start this, but fail somewhere in middle and are not able to continue. Its all about how serious you are about controlling your expenses and being disciplined. Do you think this Envelope system will work in your case ?

Gift Tax in India – Everything you wanted to know about rules and exemptions

Do you know that, when someone deposits some money in your bank account, what is its taxation angle ? A lot of people take some loan from their friends for few months and then return it back, but never think twice about it from taxation angle? Your parents deposit some money to your bank account because you want to pay the down payment of your house. While it’s a help from your parents, have you ever thought if you have to pay tax on that amount or not?

In this article lets see all the aspects about these kind of transactions, when money comes and goes out of your bank account and what are the rules for income tax on gifts received from relatives or other people in India .

Taxation on Gifts

Let us first see what kind of situations we are talking about ?

  • You swiped your credit card for your friend Rs 20,000 purchase and then your friend paid back money to you by transferring it to your bank account.
  • You asked Rs 50,000 from your friend as loan and paid him back after 1 month.
  • You got Rs 50,000 cheque from your relative on your wedding.
  • Your father transferred some money you your bank account as help for some purpose.

These are few instances, which happens in our lives. But its very important for you to understand the tax implications in various scenarios and the possible issues which can come up in the future, if income tax department decides to scrutinize your income tax returns for example. By understanding the gift tax rules and precautions to take, you will be safe. So now, let’s look at 5 points which will help you understand rules about incomes tax on gifts in a better way.

By virtue of Section 56(2), any sum of money exceeding Rs. 50000 received without consideration by an individual or an HUF from any person is chargeable to tax as income under “other sources” subject to some exclusions . Below we are going to see all those exclusions and gift tax rules.

1. Upto Rs 50,000/year is not taxable

The first major rule which every person should know is that there is no tax to be paid on gifts received (cash or kind), if the amount of the gift is upto Rs 50,000 in a year. However if the total amount crosses Rs 50,000 . Then you will have to pay the tax on the total amount received (not additional). For example – If a friend of yours gifts you Rs 30,000 in a given year, you don’t have to pay any tax on that amount, as its below the limit of Rs 50,000 .

Now suppose you also get Rs 20,000 after that, still you don’t have to pay the tax as the total worth of the gift you got in the year was Rs 50,000 till now (less than the limit of Rs 50,000) . But now, if someone gifts you another Rs 10,000 . Your total gifts in a year is Rs 60,000, so you will have to pay tax on the total amount of Rs 60,000 , not just on additional Rs 10,000 . This Rs 60,000 will be included in your income and you will have to pay tax on this Rs 60,000, as per your tax slab. Note that this is exactly how the written law is.

Since 1/10/2009, Section 56(2) has been amended and the scope of ‘’gifts’’ will include even immovable properties or any other property besides sums of money under its ambit.

2. Any amount received by relatives is not taxable at all

Another rule for income tax on gifts, is that any amount received from specified relatives is totally tax free in the hands of recipient. So if a relative gives you gift in form of cash/cheque or in consideration, you will not have to pay any tax on the amount received.

Following is the list of relations which are considered as “relatives” for this

  • Your spouse
  • Your brother or sister
  • Brother or sister of your spouse
  • Brother or sister of either of your parents
  • Any of your lineal ascendants or descendants
  • Any lineal ascendant or descendant of your spouse
  • Spouse of the persons referred  in above points

Example – So if you want to buy a house and your father/mother/sister/brother etc transfer Rs 20 lacs to your bank account. You don’t need to worry about the taxation part, because its a gift from your relatives and you will not have to pay any tax on this amount. However its a good practice to do the documentation for this, if the amount if pretty big like in this example. All you need to do is document this transaction on a paper which clearly states that who transferred the money and the reason for it, along with the signatures of both parties. In future, if there is any income tax scrutiny, this small piece of proof will be handy and will help you a lot.

Important – Note that, there is no income tax to be paid on the money received from relatives, however at times income clubbing provisions may apply, for example, if a husband gifts Rs 10,00,000 to wife, there is no ta to be paid by wife on Rs 10 lacs received, however when she invests that money and if any interest income is generated, it will be clubbed with husband income. Read all about income tax clubbing rules  here.

3. Any amount received as Wedding Gift is not taxable

One of the few advantages of getting married is that any amount you get, as wedding gift is not taxable in your hands, either from relative or non-relative 🙂 . So even if you get Rs 1 crore as wedding gift from someone in your wedding, it’s not taxable in your hands.

Lets see some examples –

Suppose if your spouse parents give you some gift worth Rs 10 lacs on marriage, it will be treated as a wedding gift and will not be taxed. However, it is not clear by provision, whether the gifts should have been on the exact date of marriage, or a few days before or later. Normally, it should be sufficient if the gift is given just on the occasion of the marriage, means either on the day of the marriage itself or a day or two before or after. Practical common sense view would prevail in such cases.

4. Gift Tax on Movable/ Immovable properties

There is a valuation aspect involved in gifting of immovable properties

  • If the property is gifted without any consideration then if the stamp duty value exceeds Rs. 50000/-, stamp duty value will be taken
  • If the property is gifted for a consideration, then the actual value of the property will be taken

In case of other properties:

  • If gifted without consideration and fair market value exceeds 50,000, then the fair market value will be taken as the final value
  • If gifted for a consideration and the Fair Market Value (FMV) less consideration is greater than 50000, then the FMV less consideration amount will be taken as the value of the gift.

5. No tax on the amount received through WILL or Inheritance

When any sum of money or any property is received under a will or by way of inheritance, it is totally exempt from Gift Tax. So if you get a real estate worth Rs 50,00,000 and some other things worth Rs 30,00,000 through inheritance , you will not have to pay any tax on that amount received.

Be cautious about the take and give transactions

At times, we ask for money from our friends for some purpose and then give it back. One of the examples I can give is what I heard from one of the readers in comments section. He swiped his credit card for a friend for Rs 50,000 and then asked his friend to pay him back through online banking. Here if you see, the amount came to his account, however it was a reverse transaction and not actually a gift, so ideally this transaction should not be considered at all.

If its a small amount and can be justified with proofs, there is not much to worry about this. But in this case, lets say there is a income tax scrutiny, and tax inspector asks you about this “Rs 50,000” coming to your account. Now – You can clearly say that the money you got from your  friend was a amount which you got back because you paid Rs 50,000 to him through your credit card. But just saying this will not be enough, He will ask you to prove it. Then you will have to bring your credit card statement, and prove to him that this was done by you for your friend and no one else.

gift tax rules in give and take

The point here is – no matters how truthful you are, there should be something you can show to income tax officers in case this is questioned. So for any transaction like this, which involves a big amount, its always a good idea to have a proof, like in the example I just gave, the credit card statement will be handy along with a small note, where you friend signs saying that you swiped your credit card for him and he will pay back the money through netbanking.

In this same case, If you ccan’tprove that this money was just a “reverse entry” , you can imagine the situation. Even if you were clean, the whole amount would be added to your income and you need to pay income tax based on your tax slabs on the ground of unaccounted income.

Another point, worth noting is that just because you have a reverse transaction, the other party can get into trouble. For example, suppose you give Rs 20 lacs to your friend, who wanted the money for buying a house and then your friend gives back those Rs 20 lacs in 3 months. Note that now there is a clear entry that you gave your friend Rs 20 lacs, so in future income tax department can reach you through your friend and ask you about this Rs 20 lacs and from where you got so much of money. They can ask you to justify the source of this money. So always keep these points in your mind.

How to document Gift transactions, Registered Deed or plain paper?

A gift deed is a deed, that is executed and delivered in which the donor transfers title to the receiver without any payment or considerations. It a document which transfer the legal title of the property to the donor, where the consideration is not monetary but is made in return for love and affection. There is indistinctness with respect to compliance of the gift deed at times, Whether a gift deed is required to be made in every circumstance

When it is required to be stamped OR get registered?

Gift made by way of cash or cheque does not mandatory requires to be executed through a gift deed. Writing a plain typed note on a paper will generally suffice. It is not required to be stamped and registration is also not needed. You may simply mention the names of persons, their relation and that the gift is being given out of love and affection.

Gift made by way of movable property is required to be made in stamp paper and stamped by the notary or court, and registration of gift deed is not required in this case. For the purpose of making a gift of immovable property, the transfer must be effected by a registered instrument signed by or on behalf of the donor. Gift of immovable property which is not registered is not valid as per law and cannot pass any title to the receiver.

Conclusion on Income Tax on Gifts received

As far as you make the transactions which can be justified, there is not much to worry, however its always a good and safe practice to document things on a paper with proper signatures. This will help you because income tax scrutiny can go back to many years of your life. The stronger your documentation and proof, the smoother will the situation be.

Thanks to Rishabh Parakh (, a chartered accountant who helped me while this post and gave his inputs. He is founder  director of Money Plant Consulting ( ) a leading Tax & Investment Advisory service provider in Pune.