Many tax savings instruments provide investment in the name of spouse, children or parents, subject to few restrictions. One can open a fixed deposit or purchase insurance in the name of his spouse or his children. He can also open a Public Provident Fund (PPF) account or purchase stocks in their names.
This can be affected in two ways; the first one is joint holding. Here the first holder is the person in whose name one wishes to invest, or through transferring the said asset to the person making the investment. The person in whose name one invests has to comply with the know-your-customer (KYC) norms. All communications will be addressed to that person. All instruments like cheques or drafts will be drawn in his or her name.
There is no problem if someone gives money to his or her spouse. This is because spouses are in the list of the relatives on whom gift tax does not apply. But if that money is invested and derives any income, then clubbing provisions of the Income Tax Act will be applicable and one shall not be able to save tax in that way.
Section 64 of the Income Tax Act – clubbing of income:
Section 64 of the Income tax Act provides that income earned out of money gifted to a spouse will be treated as the income of the person making the gift and will be clubbed with his or her income for the concerned financial year and will be taxed according to the provisions applicable to that person.
For example, if someone purchases a house in the name of his wife who has not financially contributed in the said purchase, then the rental income derived from that house is treated as his own income and it is taxed accordingly.
Beware of the tax liabilities:
It is not easy to get away without paying taxes by involving other relatives. Many financial transactions are now reported to the income tax department by banks, mutual fund companies and insurance companies, so it is not difficult to be caught while evading tax.
If a man purchases a house in the name of his wife and gives loan of the money to her in exchange of jewellery given by her having equal value, the rental income that would be derived from the house would not be taxed in the hands of that man.
Ways to avoid clubbing of income:
In spite of the existence of the clubbing provisions, one can save tax legally by transferring his assets to his spouse. If he is in the higher tax bracket than his wife, he can transfer some money to his wife in exchange of her jewellery. She can open a fixed deposit with the help of the interest which she earns out of the said amount, though it is taxed in her hands, the rate is lower.