Tax-Saving Tip: Can You Really Save Income Tax By Transferring Money To Your Wife’s Account?

Everyone seeks ways to reduce their income tax , and one strategy that has gained attention is transferring money to a spouse’s account. The question is: can this actually help save taxes? Is transferring money to your wife’s account a legitimate method to reduce tax liability , and what are the potential benefits and drawbacks? Let’s explore the answers to these important questions, based on insights from financial experts.

The Rules on Transferring Money to Your Wife’s Account

One common scenario involves a husband transferring money to his wife’s account, which is then invested in mutual funds or stocks. Alternatively, the husband may directly invest this money in his wife’s name. According to Section 64(1)(iv) of the Income Tax Act, any income earned from such transfers is subject to Clubbing Provisions, meaning that the income will be taxed as part of the husband’s income. Here’s how this works:

Mutual Fund and Stock Investments: If a wife, who is a homemaker, invests money received from her husband in mutual funds or stocks, any returns (such as dividends, interest, or capital gains) will be treated as the husband’s income. The same applies if the husband directly invests the money in his wife’s name. As a result, the tax burden falls on the husband, not the wife.

Buying Property in the Wife’s Name: If a husband transfers money to his wife’s account to purchase property in her name, Section 27 of the Income Tax Act dictates that the income from that property, including rental income or capital gains, will be taxable in the husband’s name. Therefore, any profits made from selling the property or renting it out will be included in the husband’s taxable income.

Tax-Saving Strategies : What You Should Know

If you’re looking to save taxes, there are legal and effective strategies you can follow:

Transfers Before Marriage: If a person transfers property or money to their spouse before marriage, the clubbing provisions do not apply. Therefore, any income from such transfers will not be taxed as part of the transferor’s income.

Household Expenses: If you regularly transfer money to your wife for household expenses, and she saves part of it, this saved money will not be clubbed with your income for tax purposes.

Health Insurance: You can also reduce your taxable income by purchasing health insurance for your family. Under Section 80D of the Income Tax Act, you can claim up to ₹25,000 in deductions for health insurance premiums.

Joint Investment Accounts: When opening a joint investment account, ensure that the person with the lower tax liability is the primary account holder. This is because the primary holder will be responsible for paying taxes on any interest earned from the account.

While transferring money to your wife’s account might seem like a simple tax-saving strategy, the Income Tax Act has clear provisions to prevent misuse through clubbing rules. Instead, consider legitimate tax-saving options such as health insurance or joint accounts with proper planning to reduce your tax liability effectively.