Many people look for ways to save on taxes, and one method that often comes up is transferring money to a wife’s account. However, is this truly a legal way to save taxes? Does transferring money to a spouse help reduce your tax burden? What are the potential advantages and disadvantages of this approach? Below, we’ll explore these questions based on financial experts’ views.
First Scenario: Transferring Money to Wife for Investment
Let’s consider a scenario where a husband transfers money to his wife’s bank account, and the wife, being a housewife, invests this money in mutual funds or stocks in her name. Alternatively, the husband invests in assets through his wife’s account. In such cases, who is responsible for paying Capital Gains Tax on the returns generated from the sale of these assets?
Answer:
According to experts, under Section 64(1)(iv) of the Income Tax Act, if a person directly or indirectly transfers their assets (which could include cash/money transfers) to their spouse, any income from such assets will be clubbed with the income of the person who made the transfer. This is known as the Clubbing Provisions of the Income Tax Act.
Thus, if a husband transfers money to his wife’s account, which she uses to invest in mutual funds or stocks, the dividends, interest, or capital gains generated from these assets will be added to the husband’s income, and he will be taxed accordingly. Similarly, if the husband invests directly in his wife’s name, the income generated from these assets will also be clubbed with the husband’s income under Section 64.
Second Scenario: Buying Property in Wife’s Name
Suppose a husband transfers money to his wife’s account, and she purchases a house in her name with this money. In the future, who will pay Capital Gains Tax on the sale of this property, and who will be taxed on the rental income if the property is rented out?
Answer:
According to Section 27 of the Income Tax Act, if a person transfers house property to their spouse without adequate consideration, the capital gains or rental income from the property will be taxed in the hands of the person who transferred the asset. Therefore, in this case, the husband would be liable to pay tax on the income generated from the property, even if it is in the wife’s name.
Tax-Saving Tips and Guidelines:
Here are a few strategies to legally save taxes while managing finances between spouses:
- Pre-Marriage Property Transfer: If property is transferred to a future spouse before marriage, it will not fall under the clubbing of income provisions.
- Monthly Allowances to Wife: Money given to the wife for household expenses, which she might save, will not be clubbed with the husband’s income.
- Health Insurance for Family: You can also save tax by taking health insurance for your family. Under Section 80D, you can claim up to ₹25,000 for health insurance premiums.
- Open Joint Accounts: If you open a joint account for investments, ensure that the person with a lower tax liability is the primary holder, as any interest earned will be taxed based on the primary holder’s tax rate.
Summary of Key Points:
| Scenario | Who Pays the Tax? |
|---|---|
| Transferring money to wife’s account for mutual funds or stock investment | The husband will be taxed on any income generated from such investments. |
| Buying property in wife’s name with husband’s money | The husband will pay tax on capital gains and rental income from the property. |
| Pre-marriage property transfer | Will not fall under clubbing provisions. |
| Monthly household expenses | If the wife saves from the allowance, it will not be added to the husband’s taxable income. |
By following the above guidelines and understanding the legal aspects of income clubbing under the Income Tax Act, you can ensure that your tax-saving strategies are compliant and effective.
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