Transferring money to your spouse may seem like a smart move to reduce your tax liability but the income tax law sees through it. For instance, if you transfer funds to your wife and she invests it in fixed deposits, gold, mutual funds or stocks, it may trigger clubbing provisions, where the income from those assets gets added back to your own taxable income.
Under Section 64 of the Income-tax Act, the clubbing provisions are meant to prevent taxpayers from reducing their tax liability by transferring assets or income to certain family members. Here’s how the clubbing rules work, when they apply and how can you plan your finances within the law.
How clubbing of income works if you transfer money to your wife?
Clubbing of income refers to the inclusion of another person’s income in your own taxable income in certain situations specified under Section 64 of the Income-tax Act. However, income of any and every person cannot be clubbed on a random basis while computing total income of an individual and also not all income of specified person can be clubbed.
As per Section 64, there are only certain specified income of specified persons which can be clubbed while computing total income of an individual.
If your spouse receives salary, commission, fees or any other form of remuneration from a concern in which you have a substantial interest, that income will be clubbed with the income of the spouse whose total income is higher (before clubbing), in accordance with Section 64(1)(ii).
However, there is an important exception. The clubbing provisions will not apply if your spouse possesses the necessary technical or professional qualifications in relation to any income arising to the spouse, and such income is solely attributable to the application of their own technical or professional knowledge and experience, according to a Cleartax report.
How to avoid clubbing of income ?
Here are some legal and practical ways taxpayers can plan around the clubbing provisions without violating the law. These include: