We all want to save taxes and thankfully we need not look too far. Did you know your wife can help you save your taxes?
Income Tax Clubbing Rule:
If your wife has no income and you invest in her name then the income earned on such investment is clubbed to your income. This is popularly known as clubbing rule. But there is more to it!
If you invest in your wives name [or gift her money and she invests] such that the income received is tax free, then it’s clubbed to your income but naturally not taxed. And if this is reinvested further, it is treated as your wife’s income and not clubbed to your income.
Tax Free Incomes:
Here is a list of investments which you can consider for tax free income:
- Interest received from Tax Free Bonds
- Dividends and Inflation indexed capital gains from Debt mutual Fund & MIPs & Balanced Mutual Funds
- Dividends and
long term capital gains(this is taxable as LTCG from April 1, 2018) from Equity oriented Mutual Funds and Stocks
Also Read: 25 Tax Free Incomes & Investments in India
An Example:
Suppose you gift your wife Rs 1 Lakh which she invests in HUDCO Tax Free Bonds in her name. The interest rate is 8%. So she would receive Rs. 8,000 tax free at the end of Year 1 and every year there after. This would be clubbed with your income but since the income was tax free, it would not attract any tax.
She can invest this Rs. 8,000 in bank Fixed Deposit @ 10% per annum on her name. Now the interest paid on this FD will be considered her income and not clubbed with you. So, she would receive Rs. 800 every year [as individual income up to Rs 2 Lakh is tax free] on her investment of Rs. 8,000.
In case you had everything on your name and you were in the highest tax bracket of 30%, you would have got Rs. 554 only [instead of Rs. 800]. Though this amount appears small but in the long run and better yielding investments can save you a good amount of tax.
Also Read: How are your Investments Taxed?
Added to this your spouse would be happier as this would give her a better control on finances and a sense of financial security.
I have transferred RS.1 lac to my wife saving account. She has made RS. 1 lac, 5 years Tax saver FD under her name.My wife is doing Job, but her income is under tax slab.
So, now whether can I claim that tax saver FD u/s 80c under my income tax return as I am over tax bracket.
I will also show income of that FD in my income.
To get tax exemption using tax saving fixed deposit, it should be on your name. So you cannot get the tax benefit on the same.
sir,
My case is little bit different. I am a house husband.But my wise has a gov job. If my wife give me money and i invest it in bank Fix deposit than my earned interest would be clubbed with her income or not? plz not that my annual income from interest is below 2.5 lack. My wife regularly file income tax also
The above rules are applicable for both husband/wife. So if your wife gifts money and you do FD in your name, the interest would be clubbed to your’s wife income.
Hello Amit . I would like to know how much fixed deposit I can keep in the bank as a housewife ( on my name ). From husbands income .
There is no limit
Hello Sir,
If I gift my wife some money and she invests it in a liquid fund with growth option, then for how long will the gains earned, be considered as my income under the clubbing rule? so for eg. if i gift her one lakh and the gains are 8000 in a year and after two years it is 16000 and she redeems the fund, then how much of that gain is considered as my income?
The entire Rs 16,000 would be clubbed to your income. However going forward when your wife invests Rs 16,000 any gains made on the same would be your wife’s income and not clubbed to yours.
Desr sir,
My wife is not earning. If I invest in wife’s ppf account every year since interest from ppf is tax-free, there will not be any tax liability on me and also I can claim contributed an amount to wife’s PPF in my tax return as deduction u/s 80C.
Now on the maturity of wife’s PPF account, she receives the handsome amount, which includes amount I contributed to her account, interest earned on it & interest earned on interest. So this entire amount will be the capital of my wife?
and can she further invest such entire maturity proceed on her name w/o having any tax liability on me?
Technically Principal would be still yours while all the interest earned would be hers.
Dear Amit,
How can we save tax through our Minor Child ?
Pl advice.
Further I want to invest under his name for his future financial requirements.
All return generated though investment in minor child’s name is clubbed to parent income (whoever earns more) and taxed accordingly. The only way out is to invest in prodcuts where the taxation would happen when your child withdraws the same after crossing 18 years of age. Then the redemption would be treated as his income and taxed in his hands. As at the age of 18 he might not have any income of his own he might not have to pay any tax pr pay tax in lower tax bracket.
Some of those investment options are Mutual Funds (Debt/Balanced), Bonds which pay only at maturity.
I have some FDs reserving it for my daughter education and marriage purpose. She is major and can i deposit in her name
Yes you can. Also all interest earned would be your daughter’s income and tax has to be paid accordingly.
What about gifts received/given to major son. Suppose I receive gift from my major son (who is independently earning) :
1. Would the gift amount so received taxable in my hands.
2. Would the earnings out of investment made by me (from this gifted amount) be taxable in my hands and/or clubbed with my son’s earnings.
1. The gifts received between close relatives including son/parents have NO income tax implications.
2. The income on gift has NO clubbing provision. Its treated as income of those who have received & invested the amount.
Dear Amit,
I have been contributing to PPF account on the name of my wife and was availing tax deduction. An account on the name of my wife was opened during 1990 & was extended every 5 years after completion of first 15 years. She is a housewife. Now my question is that the amount I receive by closing her PPF account will be considered as a capital of mine OR my wife? Can she further invest this money on her own name OR i will have to take that amount in my name?
For tax purpose principal amount is yours while interest is your’s wife.
Sir I and my wife both are in government service. Please you suggest me that when both are tax payer then wife can give premium of life insurance which is my name
Yes she can pay premium for your life insurance and claim tax benefit!
Amit JI.. is there any limit on gifting money to your spouse or investing on her name. Pls suggest
No there is no limit for gifting money to your spouse but remember any income on such gift would be added to your income for tax purpose.
If I give my husband gift of Rs 50000 in form of FD in any bank will I get tax benefit in this case then how much.Please suggest.
There would be NO tax benefit. The money is yours and the interest earned would be clubbed with your income. However if the interest invested further the income generated will be your husband’s and taxed to him.
Dr Santosh
Amitji,
Thanks for sharing such an wonderful information ????
I wish to share some of my queries over mail. Pl do reply.
Amit ji, In the beginning of the month I give my wife certain amount to run the family expenses. At the end she saves some amount and deposit in her name as a recurring deposit. Will that rd interest earn will attract income tax from my side?
Technically the money is yours and so any income on the same would be clubbed to your income (assuming that your wife has no other income).
However if the amount is small, IT department can take a lenient view and may not bug you with the same.
Dear sir
If I invest in a bank FD on my wifes name, eran the interest which is TAXED in my income, Now this incomes is used to invest by my wife then the earning on it would go to my wifes income. Correct?
Yes you are right
Awesome article Amit. This is really helpful and clear.
Thank you 🙂
Please, send me the procedure of tax saving through my wife or other tax saving bonds for this financial year
The information provided is false. Even if your wife earns interest on gift amount, it will be treated as husbands income only.
Sorry but the above is true as per my knowledge but you are free to consult a tax expert and also let us know in case he does not agree with above post!
You are just talking about how to save tax on interest earned on investment. Where do you declare the invested amount in your tax calculations. ?
The Tax declaration never asks for How much you invested, it asks for how much you earned!