And you thought marriage only brings woes :P
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When it comes to saving taxes, spousal investment is one route that most assessees are happy in taking because of the trust involved in the relationship. And actually most financial planners recommend this as a very helpful tool in helping you save taxes.
The Income tax Act also allows certain investments in spouse's name, even though certain limits have been set for it. We will discuss these here.
The IT Act allows one spouse giving money to the other as spouses are in the list of specified relatives whom you can gift any sum without attracting any gift tax.
An important thing to note here is that if the gifted money is invested somewhere and an income is generated by such an investment, it is treated as the income of the giver and will be included in the giver's income for income tax purposes.
The most common example of such a transaction will be purchase of a house property in the spouse's name. Now, if any rental income is derived from this house property it will be taxed in the hands of the giver.
Further, if there are any gains from the sale of such property, it will be taxed in the hands of the giver.
There are ways to avoid paying tax on such rental income as cited in the above example.
This can be done by treating the consideration for the purchase of house property as a loan to the spouse. In such a case, the rental income will be taxed in the recipient spouse's name and not in the hands of the giver.
So, what are other allowable ways to save tax as a married couple and take your household income to a higher level over a long period horizon?
Here are a few more examples of financial tax planning with spouse:
1. You can gift gold/jewellery, etc. instead of cash. There is no income on such gifts other than value appreciation. As we all know, in the last many years, there has been considerable appreciation in the value of gold. Hence, this could be a very good alternative to gifting cash if immediate returns on the investment are not sought.
This will provide very good long term returns.
2. You can save tax by gifting money to your spouse [as spouses are included in the list of specified relatives whom you can gift any sum without attracting any gift tax. This money in turn can be invested in tax exempt investments.
Few examples of such investments are Public Provident Fund,and tax-free bonds.
3. As a housewife will get money for household expenses from her spouse, if some amount of money from such payments is saved by her, the savings are treated as her own.
If that amount saved is invested anywhere it becomes the wife's income only and not included in the giver's income (and hence, you can make use of the lower income tax slab rates as applicable to your wife if she has very little other or no taxable income).
The amount of savings shown this way should be within reasonable limits and not objected to by the Income Tax department.
4. Another way of saving tax as a couple can be started even before the legal wedding takes place. This can be done at a time when the couple is only engaged but not married.
Before a marriage, there is no rule requiring the income to be included in the name of the giver. So if a fiance gifts some money to his/her fiancee and the other person doesn't have any other income or has lower taxable income then the benefit of lower income tax slabs can be used.
These are some of the indicative ways to save tax by staying within the limits set by the Income Tax Act.
Harneet Kaur is a chartered accountant, CPA and Chief Editor at taxzippy.