Often we come across questions where a person has invested in the name of his wife such as given below:
- I bought a House with name of my Wife who is house wife, but I am paying EMI of House Loan . Can I get Tax benefits/Exemption in House loan or not?
- Can I invest my money in a fixed deposit in my wife’s name with her pan card to save tax?
- My wife, who is a homemaker, opened a demat account in her name and She traded in stocks (on a small scale). How will the capital gains be calculated?
- I bought a piece of land with my income in the name of my wife, who is a homemaker. Now, I am constructing a house on the plot and the payment for the material and labour is being made by me. What is the procedure I need to follow in order to have a joint ownership of the property?
Let us look into, why a person would want to invest in his wife’s name, why is it not allowed, what are income tax rules that apply, how can one invest in wife’s name legally.
What is the need for a husband to invest in name of his wife?
A person would want to invest in the name of wife mainly to save tax. Usually husband is in the high tax bracket than his wife. Therefore he would want to invest in name of his wife to save tax. When you transfer money to someone in the lower tax bracket, you are essentially trying to avoid tax which is considered unlawful. Please remember that now most of the investments require PAN number so tracking is very easy. And the big-ticket transactions are reported to the tax department by third parties (banks, brokerages, mutual funds , insurancee companies) . In other words it is easy for authorities to find out the transactions. Infact even if you give to your other relative say mother-in-law who then gives it to your wife can easily be traced.
If You Gift money to your wife ?
As per section 56 of the Income-tax Act, money received by an individual from any person during any financial year without consideration, the aggregate value of which exceeds Rs. 50,000, is taxable under the head Income from other sources. However, exemption is available if the money is received from a relative, which includes among others the spouse of an individual. So money given by husband to his wife is not be taxable in her hands.
Your money but investment is in name of Wife
While gifting money is not taxable in case of relatives but what if this money is invested and there is some income and tax liabilities? Then for investment in name of spouse, minor child and daughter in law the income made from investment is added to the income of the person who has given the money and that person only would have to pay tax. Technically Section 64 of the Income Tax Act contains clubbing provisions as per which any income from investment made or assets purchased in the name of close relatives (spouse, minor child or daughter-in-law) is clubbed with the income of the person making the investment and taxed accordingly .This applies to all types of investments such as shares, fixed deposits, land, building, post office savings and mutual funds and follows the rules of the specific investment. For example, if you give money to your wife as a gift and she puts it in a fixed deposit, the interest would be added to your income as Income from other sources and taxed . However, if the spouse/relative has a source of income and has bought the asset through his/her own funds, the income will be taxed in his/her hands. Please note that clubbing provision comes into play only for spouse,minor child and for daughter in-law, for parents, for adult child the clubbing on income do not apply.
Investing in Fixed Deposit in the name of Wife
As mentioned earlier if you give money to your wife as a gift and she puts it in a fixed deposit, the interest would be added to your income as Income from other sources and taxed .
Investing in House in name of wife
- If you buy a housein your wife’s name but she has not monetarily contributed in the purchase and you have rented the house, then the rental income from that house would be treated as your income under Income from House Property and taxed accordingly.
- If a loan has been availed of to buy the property, you must know that the loan is always given to the owner of the house and, being a co applicant, does not entitle one to the tax concessions. (The wife may not be considered an eligible candidate for a loan by housing finance companies if she does not have an income of her own.) 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 lakh individually by each co-owner. The repayment of the interest portion of the EMI is also allowed as a deduction under section 24 of the Act.
- If you have a home loan in which you are a co-applicant but, the total EMI amount is paid by you. Then you can claim income tax exemption if you are a co applicant in a housing loan as long as you are also the owner or co ownerof the property in question.If you are only person repaying the loan, you can claim the entire tax benefit for yourself. You should enter into a simple agreement with the other borrowers stating that you will be repaying the entire loan.
- If you are paying part of the EMI, you will get tax benefits in the proportion to your share in the loan. For example you pay 75 percent of the EMI then In case you are living in the house for which home loan is taken, both of you shall be entitled to deduction in the ratio (3:1) on account of principal upto 1 lakh and interest on borrowed money up to a maximum of Rs. 1.5 lakh individually. If the house is given on rent, there is no restriction on this amount and both co-owners can claim deduction on interest in the ratio of ownership, 3:1 in your case.
Investment in stocks or equity mutual funds in name of wife
If is she has traded in stocks or equity mutual funds the tax rules for stocks i.e capital gain tax apply. For capital gains tax, it has to be seen whether the shares qualify as long- or short-term capital asset, which depends on the period of holding.
- If the shares or equity mutual funds are held for at least 12 months from the sale date, they shall be classified as long-term capital assets.Long-term capital gains (LTCG) shall be computed as the difference between the net sales proceeds (after deducting incidental transfer charges) less the indexed cost of acquisition. In case of LTCG, while calculating the cost of acquisition, the cost inflation index has to be considered. The net taxable LTCG shall be clubbed with your income and shall be taxable in your hands at 20.6% (including education cess). Further, in case the shares (other than equity on which securities transaction tax, or STT, is applicable) are listed, you have an option to offer LTCG either at 20.6% (including cess) with indexation or 10.3% (including cess) without indexation. The LTCG resulting from sale of shares, on which STT has been paid, could be claimed as tax-exempt under section 10(38) of the Act. However, the said LTCG should be disclosed in your tax returns to be compliant from disclosure perspective. The charges for the demat account to the extent to which they can be related to purchase and sale transactions, and brokerage on the sale and purchase transactions, can be reduced from the gross gains to arrive at the tax.
- If the shares or equity mutual funds are held for less than 12 months from the sale date, it shall be classified as short-term capital asset.Short-term capital gains (STCG) shall be computed as the difference between net sale proceeds (after deducting incidental transfer charges) and cost of acquisition, but the benefit of indexation shall not be available. The net taxable STCG should be clubbed with your income and shall be taxable as per the applicable income-tax slab rate. Further, STCG arising from sale of equity shares on which STT has been paid shall be taxable at 15.45% (including cess).
Can Clubbing provisions be avoided without tax avoidance?
Are there ways to avoid the clubbing provisions without crossing the line between tax avoidance and tax evasion? Yes.
Loan money : If you want to buy a house in your wife’s name but don’t want the rent to be taxed as your income, you can loan her the money. In exchange, she can give you her jewellery. For example, if you transfer a house worth Rs 10 lakh to your wife and she transfers her jewellery for the same amount in your favour, then the rental income from that house would not be taxable to you.
Invest in Tax Exempt Income : One can also avoid clubbing of income by opting for tax exempt investments. There is no tax on income from the Public Provident Fund . There is also no tax on gains from shares and equity mutual funds if held for more than a year. So, if one invests in these options in the name of the spouse, there is no additional tax liability.