Sections 60 to 64 of the Income Tax Act introduce the concept of “clubbing of income.” This means that if income is earned in someone else’s name but the tax is deducted in your name, it still counts as your income.
This rule applies to individual taxpayers. In simpler terms, if you give money to your spouse under certain circumstances and they earn interest or dividends on that money, that income will be added to your taxable income.
When Are You Taxed?
Let’s say you give Rs 2 lakh to your wife, and she invests it in fixed deposits, mutual funds, or stocks.
In this case, the income generated from these investments will be attributed to you, and you’ll be responsible for paying the tax on it.
Similarly, if you rent out a property in your name but receive the rent in your wife’s account, the rental income will still be considered yours.
This is because of the “Transfer of Income without Transfer of Asset” rule under Section 60. Essentially, if you’re receiving rent in your wife’s name for a property that you legally own, it’s still your income.
Tax-Saving Tips
Pre-Marital Property or Gifts: If you plan to get married, gifting or transferring property to your future spouse before the marriage will not trigger the clubbing of income provision.
Expenses and Savings: Money given to your wife for expenses, which she saves, won’t be added to your taxable income.
Health Insurance: Utilize Section 80D to save on health insurance premiums for your family, with potential savings of up to Rs 25,000.
Loan vs. Gift: Instead of gifting money to your wife, consider giving it as a loan at a low interest rate.
Ensure you document the loan process, from disbursement to interest accrual. This strategy can help reduce both your tax liabilities.
Joint Investment Account: Open a joint investment account, with the primary holder being the one with the lower tax liability.
In a joint account, the primary holder is responsible for the tax liability on the interest earned.
By understanding the rules surrounding income clubbing and implementing these tax-saving strategies, you can effectively reduce your tax burden through financial transactions within your family.
