Are you thinking of saving tax by depositing money in your wife’s account? So be careful! This rule of income tax can spoil the game

Often employed and business people adopt a very common method to save tax – they transfer a part of their earnings to the bank account of their spouse or invest it in their name. The idea behind this is that if the spouse does not have any separate income of his own or falls in a lower tax slab, then the family will save tax.

On the face of it, this formula seems absolutely accurate, but the rules of the Income Tax Department tell a different story. If you do not have correct information, this effort to save tax can prove costly for you. Let us understand what are the rules for gifting money to your spouse and how the tax mathematics changes when you invest.

What are the rules on gifting money to spouse?

From the income tax point of view, giving money to your spouse is completely Tax-Free Is.

• Exemption under section 56: Under Section 56 of the Income Tax Act, the spouse has been placed in the category of ‘relative’. This means that you can gift any amount to your wife or husband in the form of cash, check or property and they will not have to pay any tax on it.

• No Limit: If the same money is received from a non-relative, then the amount more than ₹ 50,000 in a financial year is taxed, but in the case of spouse, there is no upper limit.

Till now everything is fine, but the real problem arises when this gifted money is invested somewhere.

The rule of ‘Clubbing of Income’ applies as soon as you invest.

As soon as any income is earned by investing the gifted money, income tax is payable. ‘Clubbing of Income’ (Section 64) The rule comes into force.

Let us understand this with a simple example:

Suppose you transferred ₹5 lakh to your wife’s account. They made an FD of that amount in the bank, invested it in mutual funds or bought stock market/gold. Now, whatever interest, dividend or profit (capital gains) you get from this investment, will not go to your wife, but you have to pay tax.

The Income Tax Department will add that profit to your total income and collect tax as per your existing tax slab. This rule has been made so that people cannot evade tax by transferring money in the name of low income members of the family.

Under what circumstances can legal relief be available?

Some special situations have also been mentioned in the Income Tax Act, where this rule of clubbing does not apply. In these ways you can save tax while staying within the legal limits:

1. Investing in PPF: If you open a Public Provident Fund (PPF) account in your wife’s name and deposit money in it, it is a very safe and tax-free option. The interest received from PPF is completely tax-free (EEE category), hence the rule of clubbing has no negative impact here.

2. Saving on household expenses (Pin Money): The savings that women make out of the money received for running the household is called ‘pin money’. If the wife invests this savings money somewhere and earns any income from it, it will not be added to the husband’s income.

3. Earning from your own ability: If your wife works in any of your business or firms and she is getting salary or fees on the basis of her educational qualification, skill or technical knowledge, then only the wife will have to pay tax on that earning, it will not be added to your income.

4. Income on Income: This rule is quite interesting. The first income (like FD interest) from the principal amount gifted will be added to your income. But if your wife reinvests that interest money somewhere else, then the clubbing rule will not apply to that ‘second income’.