Income Tax Rules: A lot of folks, trying to cut down on their income tax, move cash into their partner’s or wife’s account, thinking it’s a clever little hack. But here’s the deal: income tax clubbing rules can backfire, and what seems like a trick can actually become a trap.
According to Section 64(1)(iv) of the Income Tax Act, if someone shifts money to their partner’s account, any income that comes from that money gets added to the original person’s income. This is known as clubbing tax. So, if the spouse or partner puts that money into mutual funds, stocks, or property and makes some income, the person who transferred the money has to pay tax on that income. These rules are in place to stop shady transfers aimed at dodging taxes.
When does tax come into play?
If a husband sends a big chunk of money to his wife’s account, and she spends it on everyday things like household bills, that transfer isn’t taxable. But if she invests that same amount to make money, the tax will hit the husband’s account. This means that just moving money around won’t save you on taxes; the rules will kick in based on how and where the income is generated. If the tax department catches any funny business, they might send a notice.
How can you save on taxes?
To save on taxes, couples can do some tax planning together. This could mean investing in a joint account, filing separate home loan details, or claiming separate 80C deductions under each name. The main thing is to make sure the transfer is legit and to understand the clubbing rules.
- There’s no tax when you transfer money to your wife or partner’s account.
- The income generated will be counted as part of the transferor’s income.
- Rental income or capital gains will also be taxed to the transferor.
- Smart tax planning is key for effective tax savings.
