One who gives a gift but later takes it back.

Indian giver derives from the alleged practise of American Indians of taking back gifts from white settlers. It is more likely that the settlers wrongly interpreted the Indians' loans to them as gifts. This term, which is certainly American, may have been coined to denigrate of the native race. Historians would now agree that, where deceit was concerned, it was the settlers who were the front runners. It isn't uncommon, and it could be argued that it is customary, for the conquering race to attempt to justify their invasion by dismissing the conquered as dishonest and stupid.

The phrase is quite early in the history of the the USA. Thomas Hutchinson described the term as proverbial as early as 1765, in his The history of the Province of Massachusetts Bay:

"An Indian gift is a proverbial expression, signifying a present for which an equivalent return is expected."

Prior to that in England the word Indian was used disparagingly to denote those English people who had spent time in India and, as such, were considered infra-dig. Eliza Haywood's, The history of Miss Betsy Thoughtless (1751) describes such a person as "this young Indian".