Can You Save Tax by Transferring Money to Wife’s Account?

There are several tax planning measures that can be executed with a spouse. However, certain activities will not result in reduced taxes. While money or other assets gifted to spouse is exempt in spouse's hands, it is still taxable in the hands of person gifting it to spouse. Also, the income generated from such gift transferred is taxable in the hands of the transferor. 

Deductions on home loans, capital gains are a few places where taxes can be saved as a couple. This article provides a detailed explanation of the situations where couples can and cannot save on taxes.   

Shares or Fixed Deposits Held in Wife’s Name

• 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 clubbed with your income. 
• Such income is taxed under the slab rates applicable.
• If there are capital losses from sales, they get added too.

Property Invested in Wife's name

• Similar to gifts, transferring property between spouses doesn't trigger immediate tax. 
• However, if there's no or inadequate consideration (money paid for the asset), the clubbing provisions come into play. 
• Income from such transferred assets still gets taxed in the hands of the spouse who initially owned them. 

Illustration

Consider the example of a husband gifting his house to his wife. Even though she becomes the legal owner, the rent remains taxable in the husband's hands, due to the clubbing provisions. The same applies if he buys a new property with his money but registers it in your name.

If you give Money to your Spouse as Loan

• 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 utilized 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.
• No tax restrictions block loans between spouses. But, ensure repayment with reasonable interest. This establishes the loan's bona fides and avoids potential issues if your spouse can't repay. 
• Remember, waiving interest or offering an interest-free loan later might be seen as an asset transfer without consideration, attracting clubbing provisions and income tax on any generated income from such investments.

If you give Money 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 attract clubbing provisions. 

How your Spouse can help you save tax? 

To increase income tax savings, there are various tax benefits that can be availed by the spouse. The following are some of the ways to maximize tax savings with the help of your spouse or family:

1) Equity Investments

Under Section 112A, a tax exemption of up to Rs. 1.25 lakhs can be claimed each year on long-term capital gains from equity shares or equity-specific units of schemes if the Security Transaction Tax (STT) has been paid. This exemption can be claimed by both spouses by investing in the shares or schemes jointly.

2) Health Insurance Policy

Under Section 80D, an individual and HUF can claim a deduction of up to Rs. 25,000 for health insurance premiums. If the cost of health insurance is higher than this limit, both of you can purchase the policies in such a way that you can exhaust the deduction limits and save maximum taxes.

3) Educational Expenses of Children

A deduction of up to Rs.1.5 lakh can be claimed under Section 80C for expenses incurred towards the education of two children. If there are more than two children or if the education expenses are more than Rs.1.5 lakh, the other spouse can claim the deduction for the additional fees or other children.

4) Home Loan Benefits

Both spouses can claim the deduction for home loan repayments and interest payments if they are joint owners of the property and co-borrowers of the home loan. This will allow the couple to claim individual deductions thus resulting in more tax savings.

5) Leave Travel Allowance (LTA)

If both spouses are employed, they can claim deduction for a total of four journeys for four years under the LTA instead of two.

By availing these tax benefits, the spouses can minimize the tax liability for the family as a unit and maximize their income tax savings.

Final Word

Any transfer of money between spouses may not directly result in tax savings but the provisions of clubbing will be attracted to ensure there is no tax evasion. In case of such a transfer, the income earned from utilising the transferred amount will be clubbed in the hand of the spouse with the higher income. However, taxes can still be saved by making proper investments and planning. 

You can get in touch with our tax experts at ClearTax for more help regarding the same.