One of the best advises that Finance Planners offer to couples is to combine their finances while planning their taxes. Combining the finance of couples together helps them handle tax in the most efficient manner. It also makes them understand where they stand in terms of personal finance planning. While combining the finances of spouses is beneficial it is important one understands the limitations set on the tax front.
The taxmen do not have any objections when it comes to spouses sharing each others’ funds in a mutual manner. Irrespective of whether the money belongs to the husband or the wife, they are permitted to handle each other’s money without any tax implications. Such mutual finance sharing between the spouses does not attract any gift tax. However, when the combined money is invested in any form yields return on the same, the returns are taxable.
when a spouse gifts money to his better half it is considered as the income of the giver. He will be taxed for the same during the Assessment year. Let us understand this concept in a clear manner through an example. The husband purchases a property in the wife’s name and the wife has not made any financial contribution for the purchase. Any income like Rent or Lease Amount earned through the property will be added to the income of the husband. The applicable tax slab will be as per the Husband’s total earning during the fiscal year. In the same wave length, when the husband invests the money on his wife’s name in financial instruments like Fixed Deposits. The interest earned from such deposits which is taxable would be added to the husband’s taxable income for the year.
One of the common misconceptions for tax evasion is to route funds to the spouse through some other relatives. For instance, say you gift a specific amount to your sister-in-law and she in turn gifts the same to your wife after a few days. Your wife receives the gifted money from your sister-in-law and invests the same in a financial instrument. Will this round about dealing attract tax? Of course yes. Right from financial institutions to tax offices, insurance companies and Mutual Fund brokerages share all investor details with the Income Tax Department. This will complicate things for you even when you route your finance through relatives to your spouse. Remember, the tax men can easily understand that your money has gone on a circular route and returned back to you intact. So when found out, you may be filed for tax evasion.
Now, the question you may ask is if such finance clubbing between spouses can be done without adding tax burden on the husband. Yes. It can be done. Let us understand this through an example. Say you want to purchase a property in your wife’s name, but she is not financially contributing to the same. In such cases, you can lend her the property worth as loan to your wife. In return she can transfer her jewellery to you worth the loan amount you give her. This will relieve you of the tax burden since any income generated by this investment will not be added to your taxable income.
Let us now look at another manner in which you can get relieved from tax burden. Go in for Public Provident Fund and similar investment options which are exempted from tax. The deterring factors in investing in the tax exempt options like PPF is long lock in periods. You can invest in Mutual Funds and Shares whose returns are tax exempted when held for more than a year period(upto 1 Lakh Capital gain).
The taxmen, for sure, understands certain practical financial nuances between the spouses. When a wife saves money from what her husband offer to her for household expenses, this is considered as her own money. She is liable to pay the tax for the return on investment she receives using this savings amount. The interest thus earned is not clubbed with the overall income of the husband for taxation purposes. However, the limit of such savings by the wife is fixed and the same needs to be taken into consideration while making investments.
The interesting aspect of clubbing the finances is that the same can be done even when a man and a woman get married. Let us assume that a man and a woman are engaged to each other and awaiting to get married. The would-be husband can transfer an amount not exceeding Rs.5 Lakhs to his fiancé. If this would-be wife does not earn or does not fall under the tax bracket, Rs. 5 Lakhs will be totally exempted from tax for her. This amount will not be included in the taxable income of the man to be married too. Remember, this 5 Lakhs is nothing but the tax exempt limit for women as per IT rules.
