Income Tax: Tax-saving strategies are a popular topic, with many individuals exploring various methods to reduce their taxable income. One commonly discussed approach is transferring money to a spouse’s bank account. However, is this method effective for saving tax, and is it legal? Let’s examine the implications based on recent guidance.
Clubbing Provisions and Tax Implications
According to Section 64(1)(iv) of the Income Tax Act, when a person transfers property, including money, to their spouse, the income generated from such property is typically clubbed with the income of the transferor. This means that if a husband transfers money to his wife’s account and she invests it in mutual funds or stocks, any income from these investments—including dividends, interest, or capital gains—will be taxed as part of the husband’s income. Similarly, if the investments are made directly in the wife’s name using funds transferred from the husband, the income will still be attributed to the husband.
Property Transfers and Tax Responsibilities
When it comes to property transfers, Section 27 of the Income Tax Act stipulates that if a house is bought in the name of a spouse and the money for the purchase comes from the husband’s account, the husband remains responsible for the tax on rental income and capital gains from that property. If the property is rented out or sold, the husband must report and pay the relevant taxes, as the income from such transactions will be clubbed with his earnings.
Legal and Tax-Saving Tips
- Property Transfer Before Marriage: Transferring property to a spouse before marriage does not fall under the clubbing provisions.
- Monthly Allowance for Expenses: Regular monetary transfers to a spouse for household expenses are not considered taxable as part of the husband’s income.
- Health Insurance: Under Section 80D, purchasing health insurance for yourself and your family can help you save up to Rs 25,000 on your tax liability.
- Other Savings Methods: Consider other legitimate tax-saving avenues such as investing in tax-saving fixed deposits, public provident funds (PPF), or making contributions to retirement funds.
While transferring money to your spouse’s account may seem like a viable strategy for tax saving, the Income Tax Act’s clubbing provisions often nullify this benefit. It’s crucial to understand these regulations and explore other legal avenues for optimizing your tax liability.
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