Interest of FD not TAX FREE for investment made in your spouse name out of your income

In our married life whether we share good moments or not, but one thing we all share is our income and invest it in the name of spouse. But we need to understand that investments made in the name of spouse out of our income may not be tax free.

Section 60 to 64 of income tax act lays down details regarding clubbing of incomes. 

What is clubbing of income : Many a times we open a fixed deposit in the name of spouse or minor child and think income or interest earned is not taxable as they are in lower or nil tax bracket. 

But unfortunately this is not true. Although it is correct that you can gift any amount to your spouse without any tax. But the gifted amounts Interest or any other income, earned by  spouse from gifts is to be included in your income for tax purposes.The only exception is if you are separated from your spouse and the transfer is in connection with the agreement to live apart. 

These measures have obviously been taken to stop tax evasion by falsely showing gifts. The transferor is liable to pay tax on income from the gift in the following situations: 

l. Transfer of income without transfer of underlying asset. For instance, you are the owner of a house, which is rented out. You may arrange that the rent be paid to your spouse, parents or sister for their benefit, but rent would be added to your income and tax you on it as the asset is still owned by you. 

2. Transfer of income producing assets is revocable within the lifetime of transferee. In the above example, you may transfer the house along with the income, but if this transfer is reversible, the income shall still be taxed as your income.

The following types of transactions will also attract clubbing. These are specific to your spouse and your daughter-in-law.

a). Income from assets transferred to daughter-in-law.

b). Income from assets transferred to any third person for benefit of spouse.

c). Income from any assets transferred to a third person for the benefit of daughter-in-law. Even the capital gains arising from sale of such gifted assets by the spouse get clubbed in your hands. 

There are certain ways by which you can save yourself from clubbing :

a). Gift to major son or daughter, or to son-in-law. Gifts to minors are always clubbed. Incidentally, this means that if you want to create wealth for your children, only gives them assets that will generate income after they turn major.

b) Gift to grandchildren.

c) Gifting away tax-free income bearing instruments such as RBI Bonds and other tax-free bonds.

d) Giving interest free loans to your adult children so as to legally reduce your taxable income.

e)If husband is in higher tax bracket then he can transfer a certain sum to his wife in exchange of her jewellery. She can open a FD and interest would be taxed in her hand.(She would start loving you more as you become owner of her jewellery)

f)Gift even if the income is clubbed. Since income on income is not clubbed. It would become advantageous in long run if you earning is high and your spouse  income is nil or low.

So in future before making any investments in your spouse name do check for taxability of income earned on it.