Do you transfer money to your spouse’s account so they can meet their personal expenses? Did you know you will have to pay taxes on them?
There's a common misconception that transferring money between spouses is a magic trick to avoid taxes. While some truth exists in this belief, the reality is far more nuanced. Let's navigate the tax implications of such transfers and separate fact from fiction and understand why and how you can save tax by transferring money to your wife’s account?
Money is Invested in Shares or Fixed Deposits or other Assets in Wife's Name
Shares may have been purchased in your wife’s name or fixed deposits may be placed in her name – but the gains from the wife’s shares or income from such fixed deposits shall be clubbed with your income. Under Income Tax, this is considered your own income and taxed at slab rates applicable to you. If there are capital losses from sales, they get added too.
Similar to gifts, transferring property between spouses doesn't trigger immediate tax. However, if there's no or inadequate consideration (money paid for the asset), the clubbing provisions come into play. Income from such transferred assets still gets taxed in the hands of the spouse who initially owned them. Consider the example of a husband gifting his house to his wife. Even though she becomes the legal owner, the rent remains taxable in his hands, due to the clubbing provisions. The same applies if he buys a new property with his money but registers it in your name. Remember, these provisions aim to prevent income-generating asset transfers solely for tax avoidance.
If you give Money to your Spouse as Loan
There could be a situation where you have genuinely transferred money to your wife’s account to meet her financial needs, for example, to help her start a business. This amount is considered as a loan if it is to be returned with interest. In case you are charging a reasonable interest and showing this as a source of income, the income earned by your wife may not be clubbed with yours.
However, the amount you loaned to your wife may be utilised to invest in shares to earn an income, and thereby you end up saving significant tax by avoiding clubbing of income (gains) on shares. Then, it may be hard to convince the tax authorities about the lender-borrower arrangement, given the close relationship of the parties and the tax savings involved. Usually, the provision is misused as a tax saving avenue and that is what the tax authorities want to be careful of.
No tax restrictions block loans between spouses. But, ensure repayment with reasonable interest. This establishes the loan's bona fides and avoids potential issues if your spouse can't repay. Remember, waiving off an interest-free loan later might be seen as an asset transfer without consideration, attracting clubbing provisions and income tax on any generated income from such investments.
If you give Money to meet Personal Expenses
If you are married and either of you is a homemaker and has no income, it is common for this person to receive some money to take care of personal expenses. This has no income tax implications and is not considered as an income in the receiver’s hands. However, any interest earned from a bank account may still be clubbed. Here’s a complete detail regardingclubbing of income, in case you need it.
How your Spouse can help you save tax?
To increase income tax savings, there are various tax benefits that can be availed by the spouse. The following are some of the ways to maximize tax savings with the help of your spouse or family:
1) Equity Investments
Under Section 112A, a tax exemption of up to Rs. 1 lakh can be claimed each year on long-term capital gains from equity shares or equity-specific units of schemes if the Security Transaction Tax (STT) has been paid. This exemption can be claimed by both spouses by investing in the shares or schemes jointly.
2) Health Insurance Policy
Under Section 80D, an individual and HUF can claim a deduction of up to Rs. 25,000 for health insurance premiums. If the cost of health insurance is higher than this limit, both of you can purchase the policies in such a way that you can exhaust the deduction limits and save maximum taxes.
3) Educational Expenses of Children
A deduction of up to Rs.1.5 lakh can be claimed under Section 80C for expenses incurred towards the education of two children. If there are more than two children or if the education expenses are more than Rs.1.5 lakh, the other spouse can claim the deduction for the additional fees or other children.
Home Loan Benefits: Both spouses can claim the deduction for home loan repayments and interest payments if they are joint owners of the property and co-borrowers of the home loan.
4) Leave Travel Allowance (LTA)
If both spouses are employed, they can claim deduction for a total of four journeys for four years under the LTA instead of two.
By availing these tax benefits, the spouses can minimize the tax liability for the family as a unit and maximize their income tax savings.
