Income tax laws deter evasion rather than impede genuine transactions among spouses.
Many people hold a common misconception that transactions between spouses are entirely exempt from tax implications. The reality is more nuanced. While certain provisions exist to prevent the imposition of taxes on asset transfers between spouses, there are also regulations in place to deter the misuse of these exemptions for tax evasion. To ensure accurate income tax computation and reporting, individuals must be aware of both sides of this coin.
Exchange of funds: Funds exchanged for everyday household expenses are standard practice among spouses. However, it is essential to differentiate between routine expenses and transfers of cash designated as gifts or investments, surpassing the scope of typical household disbursements. According to income tax regulations, transfers as gifts between spouses are exempt, meaning these transfers are not categorised as taxable income for the recipient. However, any income generated from the utilisation of such transferred funds may be considered as income in the hands of the donor.
For instance, if a husband owns a rental property and instructs the tenants to pay the rental income to his wife, as per the clubbing provisions of the Income Tax Act, this rental income would still be taxable in the hands of the husband, not his wife. Not only that, if the wife chooses to invest this money in a fixed deposit, the interest earned also would be taxable in the hands of the husband and not the wife. Or, if she uses the funds to buy stocks, the capital gains arising on the sale of the stocks will be taxed in the husband’s hands.
When you extend a loan to your spouse: Income tax laws do not impose restrictions on individuals providing loans to their spouses. However, it is advisable to ensure that the loan is repaid by the spouse, along with interest, at a reasonable rate. The payment of interest is recommended so that the bona fide of the loan is established. If you give an interest free loan to the spouse and waive it off later after their inability to pay, it may be considered as transfer of asset without consideration. Further, if the spouse uses the funds to invest in any instrument like fixed deposits or stocks, the clubbing provisions will be attracted to the income.
The transfer of property: The process of transferring property between spouses also follows a similar pattern. There are no tax implications at the time of transfer. However, if there is no consideration (money paid in exchange for receiving an asset) or inadequate consideration for the transfer, then the clubbing provisions may be attracted and the income arising from such assets that is transferred will continue to be taxable in the hands of the spouse who transferred the property. Take, for example, a husband transferring ownership of his house to his wife as a gift. Even though the wife becomes the legal owner, in the absence of any consideration, the clubbing provisions are attracted and the rental income from such a house will be taxable in the hands of the husband even though the rent is received by his wife. The same rule will apply if the husband were to buy a new property with his funds but register it in his wife’s name. The objective of the clubbing provisions are to ensure that income-generating assets are not transferred to family members with the sole purpose of avoiding taxes.
Equality for working and homemaker spouses: The tax treatment of spouses is consistent, regardless of whether they are working or homemakers. The purpose of these laws is to deter tax evasion rather than impede genuine transactions between spouses. It is crucial to remember that the clubbing provisions are attracted only when assets are transferred to a family member without inadequate consideration. Assets acquired before marriage or from one own income will fall outside the scope of the clubbing provisions. In such cases, the income generated by self-acquired assets will be taxable in the hands of the owner and not respective spouse.
In conclusion, understanding the intricacies of tax implications in transactions between spouses is indispensable for responsible financial planning and adherence to tax regulations. By comprehending these provisions and abiding by them, couples can navigate the intricate tax landscape while ensuring their financial affairs remain in compliance with the law. This understanding empowers spouses to make informed financial decisions and steer clear of unintended tax consequences.
Source: https://www.livemint.com/money/tax-implication-in-transactions-between-spouses-11699288813032.html
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