Do you transfer money to your spouse’s account so he/she can meet personal expenses? Does that money earn an income? Or do you consider it loaned? Can you save tax by transferring money to your wife’s account? Let’s understand how the income from such transfer is treated from an income tax standpoint.
Money is Invested in Shares or Fixed Deposits or other Assets
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 combined with your income. As per the provisions of the Income Tax Act, this is considered as your own income and taxed at slab rates applicable to you. If there are capital losses from sale, they get added too.
Money is considered Loaned
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.
Only 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 regarding clubbing of income, in case you need it.