Can tax be saved by depositing money into a spouse's account? What are the rules regarding gifting money?

Tax Rules on Gifting Money to a Spouse: Many salaried individuals and businesspeople assume that transferring money to their spouse's bank account or investing in their name can reduce the family's tax liability—especially when the spouse has no independent income or falls into a lower tax bracket.

However, Income Tax Department rules state otherwise. If you do not understand the correct rules and the provisions regarding the 'clubbing of income,' this tax-saving strategy could backfire.

Is gifting money to a spouse tax-free?

Yes, gifting money is entirely tax-free! Under Section 56 of the Income Tax Act, a spouse is classified as a 'relative.' Therefore, the recipient does not have to pay any tax on money gifted to them—whether in the form of cash, a cheque, or assets—regardless of the amount.

When does tax apply?

While receiving a gift exceeding ₹50,000 in a financial year from a non-relative attracts tax, this limit does not apply in the case of a spouse. Although the act of gifting money is tax-free, the tax rules change as soon as that money is invested and begins to generate income.

What is the mechanism of 'Clubbing of Income' (Section 64)?

If you gift money to your spouse and they invest it in instruments like Fixed Deposits (FDs), mutual funds, the stock market, or gold, the income generated from these investments will be taxable in *your* hands, not theirs. The 'clubbing provisions' under Section 64 of the Income Tax Act were introduced to prevent people from evading taxes by transferring assets or money to family members who fall into lower tax brackets.

Who is liable to pay the tax?

Any interest, dividends, or capital gains earned from the gifted money will be added to your total taxable income, and tax will be levied according to your applicable tax slab. When do income clubbing rules not apply?

There are certain specific situations where clubbing rules do not apply, allowing you to legally avail tax benefits:

Income from personal professional or technical qualifications: If your wife receives a salary, fee, or commission from a company or firm owned by you, and that income is earned based on her own educational qualifications, knowledge, or skills, then that income will not be clubbed with yours.

Investment in PPF: If you open a PPF account in your wife's name and deposit money into it, the interest earned is entirely tax-free. Therefore, there is no disadvantage regarding clubbing in this case.

Savings from 'pin money' or household expenses: If your wife invests savings made from the money provided for running the household, clubbing rules do not apply to the income generated from such investments.

Income earned on income: The initial income generated from gifted money will be clubbed with your income. However, if your wife reinvests that interest income to earn further returns, clubbing rules will not apply to that 'secondary income'.

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