Income Tax Season: How you can save tax by depositing money in your spouse's account; know the rule

 Clubbing of Income: The income tax filing season is on. The last date filing ITR is July 31. Taxpayers under the old tax regime, who have made investments in the financial year gone by will show this income in their ITR. When gets a monthly salary or earn money through a business, we know that we have to pay tax on it as per income tax slabs. So, we look for a number of ways to save tax that help reduce our tax burden.

Among these options, one method is known as clubbing of income.

Under this tax saving method, one can save tax by making investments in their wife's name or depositing money in their account.

You may also opt for it, but for that, it is very important to know its complete rules.

Know how it can benefit you through this write-up.

How does clubbing of income concept work?

Under Section 64(1)(ii) and Section 64(1)(iv) of the the Income Tax Act, if you deposit money in your wife's account and it generates any income (such as interest, rent, dividend), that income is added to your total income and is taxed.

This is called as the clubbing of income.

Not just wife, one can club their income with a minor, daughter-in-law, or any other specified or association of person.

However, here we will talk about clubbing of income with your spouse.

How you can utilise clubbing of income method

Gift Tax

If you gift any amount to your spouse, there is no gift tax on it. However, clubbing provision applies to the income arising from this.

Ways to save tax through investments

If your spouse has little or no income, you can make investments in her name such as fixed deposits, mutual funds, or PPF. This will result in lower tax on the income.

House Rent Allowance (HRA)

If you live in a rented house and the house is in your spouse's name, you can pay her rent and claim HRA. This will reduce your taxable income.

Transfer to savings account

By depositing money in your spouse's savings account, you can save tax on the interest earned on it. Income tax exemption of up to Rs 10,000 is available on the interest on savings account.

What should be done?

Invest in your spouse's name so that the income received is taxed less.

Use the clubbing provision properly.

Try to save tax through HRA.

What you shouldn't do?

Do not give incorrect information from income tax point of view.

Do not ignore clubbing provisions.

Do not take any financial decision without understanding.

How can you save tax?

1. If those who are about to get married make any property or gift in the name of their would-be spouse before marriage, it will not come under the provision of clubbing of income.

2. If you give money to your spouse for expenses and she saves it, that too will not be added to your income.

3. You can also save tax through health insurance. Under section 80D, you can save up to Rs 25,000 on health insurance premium in the name of your family.

4. You can also save tax by giving money as a loan to your spouse instead of gifting it to her. You can give her a loan at a low interest rate. You should just keep everything documented, from giving the loan to receiving the interest. This will ensure that the income of both of you is not clubbed and your tax liability will be reduced.

5. You can also open a joint account for investment, but the primary holder should be the one whose tax liability is lower, because in a joint account, the tax liability on interest is borne by the primary holder.