income tax rules
Often we transfer our savings to our wife’s bank account or get an FD made in her name to save tax and for security. Many times people also buy property in the name of their wife, for which they themselves make the full payment. Generally we ignore it as a household matter, but in the eyes of the Income Tax Department, it is a financial transaction. If you have gifted a large amount of money to your wife or have taken a house in her name, then it is very important to be careful while filing Income Tax Return (ITR). A small mistake can make you face a notice from the tax department.
Mathematics of tax on money given to wife and FD
Tax matters expert Umesh Kumar Jethani explains that if you gift Rs 10 lakh or any other amount to your wife, then under Section 56(2)(vii) of the Income Tax Act, the wife will not have to pay any tax on it. The wife can show it as ‘exempt income’ i.e. tax-free income in her return.
The real problem arises when the wife invests that money somewhere. Suppose, your wife got an FD of that Rs 10 lakh. Now whatever interest you get on that FD will be added to your income. In the language of income tax, this is called ‘Clubbing of Income’. According to section 64(1)(iv), the income earned from money gifted by the husband is considered to belong to the husband and tax is also to be paid by the husband.
How to sync bank records and ITR?
This situation can be a bit confusing because the bank does not know whether the FD money is a gift. The bank will report the FD interest on your wife’s PAN card. This interest will be reflected in the Annual Information Statement (AIS) and pre-filled ITR of the wife. If the wife does not consider it as her income and you do not show it in your return, there will be a mismatch in the records of both.
To avoid this, the wife should keep this interest amount out of her income while filing her ITR. She can write a note in the ‘Remarks’ column that this income has been clubbed with her husband’s income. Also, by choosing the feedback option in AIS, it should be made clear that this income is being transferred to another PAN (husband’s PAN). On the other hand, the husband should pay tax by adding this interest to his ‘Income from Other Sources’. It is wise to preserve the proof of gift deed or bank transfer to avoid any inquiries in future.
Whose income will property and rent be considered in wife’s name?
Many people buy a flat or house in the name of their wife, but pay the installments or the entire amount themselves. According to tax partner Amit Maheshwari, if you have taken the flat in your wife’s name but the money has gone from your pocket, then any income from that property will be considered yours under Section 64(1) of Income Tax.
Be it rent coming from that flat or capital gain (profit) on selling it in future, all this will be added to your income and you will have to pay tax on it. However, the property received by the wife will be treated as a gift from a relative, which is tax-free under section 56(2)(x). But the responsibility of tax on income will be of the husband who spends the money. Therefore, if the amount is large, maintain a record of bank statements and proof of income to prove that the transaction is genuine.