Tax Savings: Can I save tax by transferring money to my wife’s account?
Every individual looks for ways to save tax on their income, and one method that is often discussed is trying to save tax by transferring money to the wife’s account. The idea is that if a husband transfers money to his wife’s account, can he save tax? Is this method legal and what are the potential advantages and disadvantages associated with it?
Clubbing provisions and tax
Under Section 64(1)(iv) of the Indian Income Tax Act, if a person directly or indirectly transfers his assets (including cash) to his spouse, the income from such assets is clubbed with the income of the person making the transfer. This provision is called the clubbing provision.
Case 1: Investing in mutual funds and stocks
Suppose the husband transfers money to his wife’s account and the wife uses that money to invest in mutual funds and stocks. Who will pay the capital gains tax on the sale of these assets in the future?
According to experts, the money transferred to the wife’s account will be added to the husband’s income. Therefore, income from mutual funds and stocks, such as dividends or capital gains, will be added to the husband’s income and taxed.
Case 2: Property transfer
If the husband buys a house in his wife’s name and the money for this is transferred from the wife’s account, who will pay the capital gains tax on the sale of that property in the future?
In this case, as per Section 27 of the Income Tax Act, if a person transfers a house property to his wife without any value, then the tax on the rental income or capital gains on the property will have to be paid by the person who transfers it.
Alternative ways to save tax
- Property transfer before marriage: If you transfer the property in the name of your would-be wife before marriage, it will not be brought under the clubbing provision.
- Giving money for expenses: If you give money to your wife for expenses and she saves them, it will not be added to your income.
- Health Insurance: You can get tax benefits up to Rs 25,000 on health insurance premiums under section 80D.
- Joint Account: Opening a joint account can also save tax, but keep in mind that the primary holder should be the one whose tax liability is less because the tax on the interest of the joint account will come into the account of the primary holder.
Conclusion
It is not possible to save tax by transferring money to the wife’s account, as such attempts are disallowed under the clubbing provision. To save tax, you should use other valid and legal methods, such as health insurance or joint account. With these measures, not only can you save tax, but also strengthen your financial planning.