Most of the families having the wives are home-makers and their husbands are in the highest tax bracket thanks to higher disposable income. Usually, high tax payers would temptation to pass on assets and invest in the name of family members mainly to save their taxes or emotionally or whatever other reasons. We have been getting host of quarries from the families regarding implications of investment in the name of spouse and children so as to lower their tax burden. The subject is as tricky as tax laws do not allow you to evade taxes by transferring your assets. Many of us are partially aware or unaware about the details of the provisions of proxy investments which one may easily fall foul of the taxman. Income tax has the powerful tool, what are called, ‘clubbing’ provisions which reverse the gear one’s income with that of transferor. In this post, we shall closely look into the implications and tackle these tricky issues.
Gifting Money to Wife and minor children
Though cash or non-cash gift of any amount given by husband to his wife is not considered as income in her hands, the interest generated on the gift, if invested, will be taxable for her husband. Similarly, the clubbing rule also ensures that income generated from direct or indirect transfers to minor child gets added to your income and, hence, it defeats your objective of tax savings. Please remember today, the income tax department is geared to catch big-ticket transactions in your returns as the most of the investments require PAN number so tracking is very easy. Hence, you should not fall into the trap of losing control over your income by gifting to family members or receiving the money without any consideration in your desire to save on taxes. In other words it is easy for authorities to find out the transactions. In fact even if you give to your other relative say mother-in-law who then gives it to your wife can easily be traced.
Buying House in the name of wife
Many intend to buy a second home in the name of wife to avoid getting into wealth tax and rent issues even though she may have no money of her own to buy it without knowing the tax implications of keeping it vacant. Though you can, now escape from your wealth tax liability thanks to the Budget for 2015-16 has proposed to scrap the Wealth tax act, since technically you are gifting the house to your wife, and clubbing provision may still be attracted. Hence, you cannot avoid tax on notional rent even if your second home is not rented and the actual rent received by your wife from a house property as you gifted her will be taxed as your rental income. So, you could not benefit by showing rental income as your wife’s income who is in zero or low tax bracket. You will have to show it in your tax returns and pay the tax as per your slab. The Budget for 2015-16 has a proposal mandating declaration of the permanent account number (PAN) for any purchase or sale exceeding Rs1 lakh. Tax authorities are also making provisions to check ‘splitting of reportable transactions’ by people to avoid giving the PAN. The Budget also prohibits acceptance or payment of an advance of Rs20,000 or more in cash for purchase of immovable property. So, there is no real tax benefit in buying property in the name of wife except, maybe, making your wife and in-laws happy. Also Read : House Purchase in the Tax Edge
Joint Home Loan Tax Benefit
If you are thinking to avail a home loan as jointly which you are a co-applicant whereas the owner of the house is solely your wife, you would not entitle to get tax concessions even you have been paying full EMI from your taxable income. The law states that you can only claim income tax exemption if you are a co applicant in housing loan as long as you are also the owner or co-owner of the property in question. Mere just paying EMI and a co applicant in a housing loan could not make eligible you to avail the tax benefits.
For claiming income tax deduction, the EMI amount is divided into the principal and interest components. The repayment of the principal amount of loan is claimed as a deduction under section 80C of the Income Tax Act up to a maximum amount of Rs 1.50 lakh individually by each co-owner. The interest component of home loans is allowed as deduction under Section 24 B for up to Rs2 lakh in case of a self-occupied house increased in Budget 2014-15 from Rs1.5 lakh to Rs2 lakh. This limit is only for self-occupied house. If you have property which is rented out, you can deduct the full interest paid on the home loan. Also Read : Your Home Loan and Tax Planning!
Mutual Fund Investments in the name of Wife and Minor Child
If you invest into shares or equity mutual funds in the name of wife and are held for at least 12 months from the sale date, they are treated as long-term assets and long-term equity funds are tax-exempt, you do not need to worry about future gains but gains from debt funds are taxable and hence they shall be clubbed with your income and shall be taxable as per the applicable income-tax slab rate. You can apply the same concept for investment in the name of your minor children. If you do not need the money, you can defer the redemption of debt funds invested in growth option possibly, they turn major at age 18; the growth option debt mutual fund units redeemed will be taxable in the hands of your children, who may be in the zero- or low-tax bracket. Also Read : Debunking Mutual Fund Investments Mistakes!
Bank FDs in the name of Wife and Minor Child
Unlike debt mutual funds cumulative fixed deposits, cannot defer taxes. Under the mercantile system, you will have to pay taxes on the accrued interest at the end of each financial year, even if you do not get anything in hand until the maturity of the fixed deposit (FD). If you invest in FDs in the name of your wife or minor child, you will have to include the interest in your income, due to the clubbing provisions for your gift. Even though there is no gift tax in India, clubbing provisions under Section 64 shall be applied. However, you could have opened two FDs of Rs16,650; one per child because the interest on bank savings in the name of your minor child is clubbed with your income, Rs1,500 interest per child is exempted from tax and is allowed for a maximum of two children. While assuming the interest @9%pa would have been tax-free for you Rs3,000 interest from two children’s bank accounts exempted from your taxes will mean almost Rs1,000 saved, if in the 30% tax bracket. Also Read : Are your Fixed Deposit Returns axed by TDS?
The key to tax savings with investment in the name of your family members is that the money should be transferred to a family member in the lower tax bracket carefully without resorting to unlawful methods to prevent being viewed as tax avoidance. For example, avoid opening an FD in the name of your parents just to get 0.5% to 0.75%pa of higher interest. If investment is large IT officer can question the source of income of retired parents. Don’t be penny-wise and pound-foolish.
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