Transferring money to spouse account is a common practice which we all of us do. Be it for monthly expenditures or gifting or for any other purpose the money transfer is without any hassle. Till now giving money to your spouse in cash was more common. But with digitization thrust and discouraging cash transactions, even for household expenses, online transfer to spouse account will be effectively used.
When it comes to money transfer to any person Income Tax implications may arise. However, money transfer within certain relations has been exempted in income tax. Where are these exemptions applicable and whether your relations cam claim this, need to be looked at before taking a decision for money transfer. Husband Wife relation is one of such relation which comes under definitions of Relatives exempted from income tax at various levels. Still, there are financial transactions where even this relation may have tax implication.
Let’s understand what happens when you give money to your spouse in different situations:
1. Money For Household Expenditure
Giving money to your wife for household expenditure is fairly common especially when she is a housewife. In most households, the housewife is the one who takes care of the household expenses and so husband gives cash money to meet them. This has no income tax implication and so the money received from the husband is not considered as her income. However, if wife keeps this money in her savings account and any income is earned on it then Clubbing Of Income Tax Rule will apply. Under this provision, the income earned on this money will get clubbed with the husband income and he will be liable to pay tax on it. Since until now, cash amount was given it was hardly deposited into banks account. All the expenditures were taken care in cash due to which there was no earning on the money. However, if online transfer is done in wife account then there will be interest earning on which husband will be liable to pay income tax due to clubbing of Income Provision.
2. Giving a Loan to Wife
Many businessmen used this strategy where they give a large amount of money to their wife in the form of loan. Even salaried individuals would have used this mode of transfer of money for any purpose like wife starting a home business for which she needs capital. Here also husband gives the money in the form of a loan. Now if interest is charged on this loan and paid from wife’s account regularly then surely husband would be showing it as his income. However, we have come across many instances when this transaction is shown as a loan to the housewife and the money get further invested for earning an income. This is done to reduce the taxability assuming the income earned on the loan amount will be treated as wife income. But this is not the case. By clubbing of income provision the income earned on the loan amount will get clubbed with the husband income and so the tax liability will be on husband and not on the wife.
3. Gifting Money to Wife
A husband may gift a higher amount to her wife on birthday or anniversary or on any other special occasion. By gift tax provision any gift from a husband to wife and vice versa is exempted from gift tax for any amount. So this amount transferred as a gift to the wife will have no tax liability on any of the individual. However, if the wife invests it further and earns any income out of it then clubbing of income provision will apply which means income earned will be added to husband income and will be taxable as per his income tax slab.
4. Investments By Wife
This has been in practice for long especially in the real estate. Husband buys a property in wife name through his surplus or husband investing in shares/mutual funds on wife name. One of the reasons behind this strategy is to avoid too much tax and so splitting the money is chosen. However, not many of us know that clubbing of income applies not only in the case of minors but even in husband-wife relations. Any investment done in the wife name will yield returns which will be treated as husband income. So if the property or mutual funds/shares is sold and capital gains is derived then these capital gains income will be clubbed with the husband income and will get taxed accordingly. This means the probability of avoiding tax by splitting the investments in wife name is not a good strategy as the tax man will catch you.
Financial transactions between husband and wife is a very common phenomenon in every household and will continue to happen. However, one need to be careful in transactions where tax liability can arise. The most common section which is applicable in cases of husband and wife is Clubbing of Income. If the transaction is done to avoid tax then you may face the taxman especially in today’s scenario where Income Tax authorities have become more vigilant. Still, keep doing the financial transactions if they are genuinely for your personal needs or you are celebrating special occasions but adhere to the Income Tax Laws.
Disclaimer: This article is written within my understanding of income tax provisions on transferring money to wife. It’s recommended to seek advice from a good tax expert for taking any decision which may have income tax implications.
Image Courtesy: freedigitalphotos.net