Investment in the name of family members: Tax Angel


Investment in the name of family members: Tax Angel

A person often invests in the name of the family members not only as a token of love, affection or emotion but also with the aim to provide security & for tax planning. There are various instances where one member is the main earning member in the family & is in the highest tax bracket whereas other members are in low tax bracket. Often, I come across questions like, my wife is a homemaker & if I opened a demat account in her name to trade & invests in share, whether I can shift my income in her hands for taxation purpose? Can I invest in shares, FDR, etc the name of my family members to save tax? If I buy a house in the name of my wife, son etc I get all the tax benefits towards interest & principal repayment if I make the payment of the loan? Can I pay salary or commission to my family members from firm to reduce tax burden? Whether diverting amount/investment in the name of wife would result in tax saving?

Gift Not Taxable:

If any person receives any money or property of aggregate value exceeding Rs. 50,000/- during any financial year without consideration then it is taxable in the hands of recipient as income. However, above rule is not applicable if the gift is received from specified relatives. In short, if any amount is gifted to wife, son, daughter or parents then such gift is not at all taxable in the hands of the recipient. Nor the donor is liable to pay any tax on such gift given.

Taxability of income generated from amount / property Gifted to family Members:

  1. a)Where an asset is transferred by an individual to the spouse directly or indirectly otherwise than for adequate consideration or in connection with an agreement to live apart then any income from such asset is deemed to be the income of the transferor. For example, if amount is transferred by husband to the wife who in turn makes an investment in FDR/shares/ property etc in her name then Income by way of Interest, Profit, Rent therefrom would not be treated as her individual income but would be clubbed with the income of husband for taxation.
    b) Similar provision is there in respect of income of minor wherein income is required to be clubbed with the income of the parents.
    c) Above clubbing provision is not applicable in respect of gift done to major son, daughter. Income earned by major son/daughter out of the gifted amount would be treated as their individual income & would not be subject to clubbing provision. However, if any asset is transferred to son’s wife, directly or indirectly, without adequate consideration then such income will not be taxed in the hands of the person receiving it but will be clubbed with the income of mother-in law or father-in-laws.

Deduction by making the payment of housing loan of family members: It may be noted that ownership in a house property is one of the first & foremost vital pre-condition for claiming deduction towards Interest u/s 24(b) & towards Principal repayment u/s 80C of the Income Tax Act -1961. Without ownership in the house property, no deduction can be claimed by other family members.

Salary/Commission etc to Family Members:

  1. Paid to Spouse:
    If the salary, commission etc is paid to spouse as a result of technical or professional knowledge, experience, etc then such amount paid is eligible for deduction & would not be subject to the clubbing provision. Otherwise, it will be subject to clubbing provision.
  2. Paid to Other family members:
    Reasonable & justifiable amount is paid to family members towards salary, interest, commission, rent etc then it is allowable as deduction. However, if the amount so paid is excessive or unreasonable then it may be disallowed u/s 40A(2(b).

Transfer of Income without transferring Assets:
When any taxpayers transfers the income by agreement or any other way to any other person without transferring the ownership of asset then income would still be taxable in the hands of owner. For example, husband owning a flat may direct the tenant to pay the amount of rent to mother. In such case, rent would still be taxable in the hands of the son. Best way would be the gift of the flat or purchase of flats in the name of mother itself.

Family members can be the biggest source of tax planning for the taxpayers. Of course, subject to all above tips & cautions.