February 2014

Understand Income Tax Clubbing provisions and How to invest in Spouse’s Name

Income Tax clubbing Provisions, Investing in Spouse Name, Tax Implications, Section 64

Financial planners contend that couples should ideally combine their finances. The meshing together of the investments of the husband and wife not only strengthens the household’s financial fibre but gives them a comprehensive view of the real situation.

However, the taxman has set limits to this joining of the finances of the two spouses. He has no problems if one spouse gives money to the other. After all, it’s their money and spouses are in the list of specified relatives whom you can gift any sum without attracting a gift tax.

But if that money is invested and earns an income, the clubbing provisions of the Income Tax Act come into play. Section 64 of the Income tax Act says that income derived from money gifted to a spouse will be treated as the income of the giver. It will be clubbed with his (or her) income for the year and taxed accordingly.

For instance, if you buy a house in your wife’s name but she has not monetarily contributed in the purchase, then the rental income from that house would be treated as your income and taxed at the applicable rate. Similarly, if you give money to your wife as a gift and she puts it in a fixed deposit, the interest would be taxed as your income. Don’t think you can get away by clever ploys involving other relatives.

For instance, one may think of gifting money to his mother-in-law, a transaction that has no gift tax implications. Then a few days later, the lady gifts the money to her daughter, which again does not have any tax implications. The money can then be invested without attracting clubbing provisions, right? Wrong.

Given that most big-ticket transactions are now reported to the tax department by third parties (banks, brokerages, mutual funds, insurance companies), it may not be difficult to put two and two together. If the taxman discovers this circuitous transaction, you may be hauled up for tax evasion. Are there ways to avoid the clubbing provisions without crossing the line between tax avoidance and tax evasion? Yes.

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.

One can also avoid clubbing of income by opting for tax exempt investments. There is no tax on income from the Public Provident Fund (although the 8% interest rate offered and the 15-year lock-in does not compare with fixed deposits). 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.

In fact in case of PPF , Shares, Mutual Funds, FMP’s , Tax free Bonds etc the section 64 clubbing provisions are still applicable but as the income is tax free, no worry for you.

(~ Source Economic Times)

July 2013

What is Wealth Tax?

Wealth Tax in India, Tax planning, Tax filing, Assets which are liable to taxes

There may be liberty and justice for all, but there are tax breaks only for some. ~ Martin Sullivan

A majority of the tax payers in India are ignorant about the wealth tax, and it’s implications.

Wealth tax is a good potential annual recurring income stream for the government. However, it is perplexing why the tax authorities are lax on this aspect of tax collection. Political compulsions, Pressure from the affluent to look the other way, or probably because they have more pressing revenue sources, whatever the reasons may be, the common man needs to be aware of the implications of wealth tax, as the authorities can come after them at any point in time.

So what is Wealth Tax?

Wealth tax is a direct tax levied on the ownership of certain assets by individuals and Hindu Undivided Families (HUFs) even though these assets may not generate any income. It is an annual tax and is imposed with reference to the previous financial year or the present assessment year. It is governed by the Wealth Tax Act, 1957. 

The assets which are taxable under the Wealth Tax Act are residential property other than one house, guesthouse, farmhouse, motor cars, precious metals including those in (more…)

February 2013

Time to take double indexation benefit ~ From Now until March 2013


Double Indexation Benefit, Save Taxes, Invest in FMP's, Fixed Maturity Plans NFO'sIt is that time of the year when you have a window of opportunity to intelligently invest for just over 1 year and get tax free returns.

The opportunity arises every year from mid-feb until financial year ending i.e March 31

You need to invest in Fixed Maturity Plans (FMP’s) of more than 14 months and which matures in April 2014. By doing this, your investment in a debt product spans over three financial years. And thus enables you to take advantage of double indexation on long term capital gains (which is taxed @20.6% post indexation) .

With inflation running at almost 8 %, the returns virtually becomes tax free. And is ideal for investors in highest tax brackets (30%). (Cost Inflation Index Table)

Fixed Maturity Plans are closed ended funds and are available as NFO’s. They are open for very short periods of time (generally 4 – 5 days). These funds are available from leading Asset Management Companies (AMC’s)  like HDFC , ICICI , Birla Sun Life, Kotak, Reliance etc. You can find the open NFO’s at the AMFI Website : NFO’s

The estimated current yields on these FMP’s should be in the range of 9.5 %.

FMP’s are ideal tax saving vehicles and suited for investors in the highest tax brackets, who are conservative, looking to park lump sum funds for about 1-2 years, in return for a Fixed Income similar to FD’s.  Please note that the drawback of investing in FMP’s is illiquidity.

The advantage of investing over FD’s in terms of returns is a no brainer. Current 1 year FD returns are at around 8.5% and so the post tax returns (for the highest tax bracket) is pathetically around 5.8%

The tax advantages of investing in FMP’s is mentioned in detail here (What-are-fixed-maturity-plans-fmps-advantages-disadvantages) and I will not elaborate on that further.

Happy Investing and tax savings this season.