Financial planners contend that couples should ideally start with making joint investments. When husband and wife make joint investments, they not only strengthen their household’s financial fiber, but are even closer to a comprehensive view of the real situation.
Joint Investment with Spouse
The tax man has set limits for the joint 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, which makes joint finances an even better idea. 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 for joint investment but she has not monetarily contributed in the purchase, the rental income from that house would be treated as your income and taxed at the applicable rate. Similarly, with the idea of a joint finance, 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.
Joint Finance: Be Cautious
Don’t think you can get away by clever ploys and indulge in joint investments by involving other relatives. For instance, to make joint finance convenient, 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 joint investment can then be made 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 and your joint investment scheme would terribly fail.. If the tax man discovers this circuitous transaction, you may be hauled up for tax evasion.
How to Manage Joint Investments
Are there ways of joint investment that can 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 lakhs 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 while making joint investments 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 makes a joint investment in these options in the name of the spouse, there is no additional tax liability. For the same reason, it’s better to gift gold jewellery instead of cash to your wife because gold does not generate any income. Besides, in the past few years the appreciation on gold has been higher than the returns offered by fixed deposits, which makes it a better option for joint investment. The clubbing rule also applies in case of investments made in the name of minor children (below 18 years). The income earned from such joint investments is clubbed with that of the parent who earns more. Earlier, you could avoid this tax by investing in along term deposit which would mature when your child turned 18. But this rule changed a few years ago. Now, the interest earned on fixed deposits and bonds is taxed every year even though the investor gets it on maturity. So, opening fixed deposits in the name of minors makes little sense any more.
Instead, open a PPF account in the name of the child because, as mentioned earlier, PPF income is not taxable at any stage. The contribution to your own PPF account and that of the child cannot exceed the overall limit
of ` 70, 000 a year. However, the tax man does allow a few concessions to couples. If a wife saves a little out of the money given to her for household expenses, that money is treated as her own. If it is invested, the income will be treated as her income and not clubbed with that of the husband. But this clause is subject to a reasonable limit. Incidentally, a wife can help her husband save tax even before they get married. If a couple is engaged, and the girl does not have any taxable income or pays tax at a lower rate, there can be a joint investment as her fiancé can transfer money to her. The income from those assets won’t be included in his income because the transaction took place before they got married. One can give up to ` 1.9 lakhs (the tax exempt limit for women) without putting any tax liability on the girl.