Many individuals believe that transactions between spouses are tax-free. But the truth is bit more complex. While certain measures exist to avoid the application of taxes on asset transfers between spouses, there are also laws in place to discourage the abuse of these exceptions for tax evasion. Individuals must understand both sides of the income tax equation in order to determine and file taxes accurately.
Funds transferred for ordinary household costs are common among couples. However, it is critical to distinguish between ordinary costs and monetary transfers intended as gifts or investments that exceed the scope of normal family transactions. According to income tax legislation, transfers as gifts between spouses are exempt, which means that the receiver does not have to pay taxes on them. However, any income earned by the use of such transferred money may be regarded income in the hands of the person who gave the money.
For example, if a husband owns a rental property and tells the tenants to give the rental income to his wife, the rental income will still be taxable in the husband’s hands rather than his wife’s. Furthermore, if the woman decides to place this money in a fixed deposit, the interest collected from this fixed deposit will be taxed to both the husband and the wife. Alternatively, if she uses the rental money to purchase stocks, the capital gains on the sale of those stocks will be taxed from the husband’s pocket.
The same logic applies to property transfers as well. Assume that a husband transfers ownership of his home to his wife as a gift. Even if the wife becomes the legal owner, in the absence of any consideration, the clubbing rules of the Income Tax Act shall apply, and the rental income from such a residence is taxable in the husband’s hands, even if the income is obtained by his wife.
On the other hand, individuals who lend loans to their spouses are not subject to income tax constraints. However, it is important to guarantee that the spouse repays the loan, including interest, at a reasonable pace. Interest payments are recommended in order to verify the loan’s legitimacy. If you grant your spouse an interest-free loan and then waive the loan later due to their incapacity to pay, it may be regarded as transfer of assets without consideration. Furthermore, if the spouse uses the loaned out money to invest in any instrument, such as fixed deposits or stocks, the clubbing provisions (as previously stated) will be applied to the income created by those assets.
It may also be noted that spouses are taxed the same way, regardless of whether they are working or homemakers.
The clubbing provision in the Income Tax Act seeks to ensure that income-generating assets are not given away to family members only for the purpose of evading taxes. It is important to keep in mind that the clubbing laws apply only when assets are transferred to a family member without due consideration. Assets obtained before marriage or from one’s own income will not be subject to the clubbing restrictions. In such instances, the income created by self-acquired assets will be taxed in the hands of the owner rather than the respective spouse.
Understanding the complexities of tax implications in spousal transactions enables couples to make educated financial decisions while avoiding unwanted tax repercussions.
