How is money gifted to your spouse taxed?

If I open a bank account in my wife’s name and transfer the amount to create an FD of ₹3 lakh in her name, does she have to pay tax on this money? She is a professional but is on sabbatical now. Her annual income at present includes FD interest from three FDs each of ₹1 lakh (her own) and ₹15,000 per month received from her father.

I want to know how much tax she must pay for her own assets? Also, how much tax should she be paying after I transfer the FD money? How can she save tax in this scenario?

—Name withheld on request

As per the provisions of the Income-tax Act, 1961 , interest income from FDs is taxable under the head income from other sources at the applicable tax slab rate for an individual, subject to a maximum deduction of ₹50,000 under section 80TTB of the Act (applicable only for resident senior citizens i.e. resident individuals above 60 years of age during the relevant financial year).

In case you open a bank account in your wife’s name and transfer the amount to create an FD of ₹3 lakh in her name, the same would be considered as a gift between specified relatives as per provisions of section 56 of the Act and neither your spouse nor you would be required to pay any tax on the transaction of making this gift/ transferring the funds.

However, as per provisions of section 64 of the Act, incomes arising directly or indirectly to the spouse receiving the gift from the assets gifted shall be clubbed in the income of the spouse who has gifted for the purpose of levy of income tax.

Hence, in the instant case, if the funds are transferred by you to your spouse’s bank account for the purpose of investment in FDs, the interest arising from such FDs shall be clubbed in your taxable income (and not your spouse’s) and will be taxed in your hands at your applicable tax rates.

Further, the grants received by your spouse from her father (being specified relative) shall not be considered as taxable income in her hands, as per provisions of section 56 of the Act.

The interest/ income received by your spouse from her own FDs and any other investments that she makes from the funds granted by her father would be taxable in her hands.

Assuming that your spouse qualifies as Resident in India with income within ₹250,000 to ₹500,000, she is eligible for tax rebate under section 87A of the Act. Hence, no tax liability should arise in respect of her personal incomes.

Separately, you may explore the possibility of claiming the specified deductions under chapter VI-A in respect of the investments / contributions made during the year to lower your own tax outgo.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.

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