What are the rules on gifting money to spouse?
Often employed and business people adopt a common method to save tax. They transfer a part of their earnings to their wife’s or husband’s bank account or invest it in their name. The idea behind this is that if the spouse has no income of his own or falls in a lower tax slab, then the family will save tax. This formula seems absolutely perfect, but is it really so? If you are also adopting the same trick to save tax, then be careful. Income Tax Department rules 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?
If seen from the income tax point of view, giving money to the husband or wife is completely tax free. Under Section 56 of the Income Tax Act, the spouse is categorized as a ‘relative’. This simply means that any amount you can gift to your wife or husband in the form of cash, check or property, they will not have to pay any tax on it. For your information, let us tell you that if the same money is received from a non-relative, then the amount of more than Rs 50,000 in a financial year is taxed. But there is no such limit in the case of spouse. Till now everything is fine, but the problem arises when this gifted money is invested somewhere.
Tax mathematics reverses as soon as investment is made
As soon as the gifted money is invested and earned, the ‘clubbing of income’ (Section 64) rule of income tax comes into force. Understand this with an easy example. Suppose you gave money to your wife and she invested that amount in FD, mutual fund, stock market or buying gold. Now whatever interest, dividend or profit (capital gain) you get from this investment, you will have to pay tax on it, not your wife. The Income Tax Department will add that profit to your total income and then collect tax as per your tax slab. This rule has been made so that people cannot evade tax by transferring money in the name of low income members of their family.
When can we get legal relief from this rule?
However, there are some special situations 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:
- Investing in PPF: If you open a Public Provident Fund (PPF) account in your wife’s name and deposit money in it, then it is a very safe option. The interest received from PPF is completely tax free, hence there is no harm in the rule of clubbing here.
- Saving on household expenses: Women often save some amount of the money (pin money) they receive for running the household. If the wife invests this savings somewhere and earns any income from it, it will not be added to the husband’s income.
- Earning from one’s own ability: If your wife works in your own business or firm and 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.
- Profit on profits: This rule is a bit interesting. The first income (interest) from the gifted money will be added to your income. But if your wife reinvests that profit elsewhere, then the clubbing rule will not apply to that ‘second income’.
