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Often employed and business people think that if they transfer money to their wife or husband’s bank account, or invest in their name, then the family tax will be reduced. Especially when the partner has no income of his own or falls in a very low tax slab.

This idea sounds very good, but in reality the rules of the Income Tax Department tell a different story. If you are not aware of the correct rules and ‘clubbing of income’, then this trick of saving tax can prove to be very costly for you.

Is gifting money to a partner tax-free?

Absolutely! Under Section 56 of the Income Tax Act, the spouse is considered a ‘relative’. This means that no matter how much money you gift to your partner in the form of cash, check or asset, the recipient does not have to pay any tax on that money.

But, the story does not end here. Giving money may be tax-free, but as soon as that money is invested somewhere and starts earning, the income tax rules change completely.

What is the game of ‘Clubbing of Income’ (Section 64)?

Suppose you gifted some money to your wife and she made an FD of that money, or invested it in mutual funds, share market or gold. Now whatever interest, dividend or capital gain you get from that investment, the tax on it will not be paid to your wife, but To you Will have to give.

Under Section 64 of the Income Tax Act, it is called ‘clubbing provision’. This rule has been made so that people cannot evade tax by transferring money in the name of their family members who pay less tax. This income from investment will be added to your own income and then it will be taxed as per your tax slab.

When do these rules not apply? (Right ways to save tax)

There are some special situations where these clubbing rules do not apply and you can get relief through legal means:

• Money saved from household expenses (Pin Money): If the wife saves some of the money received for running the household (Pin Money) and invests it somewhere, then the rule of clubbing does not apply to the income earned from it.

• Earning from one’s own ability: If your partner works in your same firm or company and they are getting salary or commission based on their own education, skills or experience, then their income will not be added to your income.

• Investing in PPF: If you open a Public Provident Fund (PPF) account in your wife’s name and deposit money in it, then the interest earned on PPF is completely tax-free. Therefore, there is no harm in clubbing here.

• Earnings on Earnings: The first income (interest) from the money you gift will be added to your income. But, if your wife earns more by reinvesting that ‘interest money’ somewhere else, then this rule does not apply on that ‘second income’ and she is saved from tax.