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 from Equity oriented Mutual Funds and Stocks
Also Read: 25 Tax Free Incomes & Investments in India
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.