Q: I am a salaried employee. I intend to purchase RBI Savings Bonds of Rs 15 lakh in the name of my wife. She will earn an annual income of Rs 1,20,000. This being below the tax threshold of Rs 1,45,000 applicable to ladies, she does not have to pay any tax. Please advise whether she should file IT Returns.

?Mohan Gole

It appears that you intend to use your wife as a name provider for investing your own money. This is illegal. It is better to treat it as a gift to her and club this income in your hands. Normally, this clubbing provision dissuades anyone from giving a gift to the spouse.

But there is nonetheless an advantage in giving such gifts for saving tax.

In the case of assets gifted to one’s spouse, once you have paid the tax on this first-stage interest, the interest becomes her own asset. When she invests this interest, any income thereon is not clubbed in the hands of the donor. It is taxed in the hands of the donee.

For clarity, let us take your case. You are supposed to include the interest received by her of Rs 1,20,000 every year in your tax returns and pay tax thereon at the rate applicable to you. Suppose she invests this amount of Rs 1,20,000 in RBI Savings Bonds. She will earn an interest of Rs 9,600. This amount will be exigible to tax in her hands. In other words, you pay tax on the interest earned on the original corpus gifted to her, but the interest on interest is taxable in her hands.

Normally, this clubbing provision dissuades anyone from giving a gift to one’s spouse. Now, have a look at the table to be convinced about the great benefit of gifting. You will be surprised to find that your wife will become a taxpayer in about 12 years. Yes, at that stage, she can avoid paying tax by investing certain amounts in PPF.

Therefore –

1. Apply for a PAN card for her.

2. Start filing returns right from now, even if she is not required to pay tax at the present stage. This will maintain continuity. Otherwise, after 12 years, it would be difficult for her to explain the source of her income.

3. Open a PPF account in her name. Contribute the minimum amount of Rs 500 to keep the account alive. When she actually begins needing the account for tax saving, she will find that she has an account with a term, much less than 15 years.

Q: Some shares and mutual fund units are jointly held in a demat account with my wife’s name first and my name second. The shares belong only to me since I have funded for them. Her name is added as a matter of safety. Now the DP is asking for PAN Numbers from both of us. My wife is not a tax payer and therefore, does not have any PAN.

In that case, is the DP right in demanding for a PAN card for her? If yes, and I procure the card, will she have to begin filing returns though she does not have any income?

?Dr J K Sharma

1. You have made an error by having her name as the first holder. You can take corrective action by opening another demat account with your name first and her name as the second holder. After opening such an account, transfer all the shares from the old account to the new and close the old account.

2. Yes, she will have to get a PAN, even if she is a second holder and even if she has no income.

3. There is no need for her to file the returns. An apparently wrong notion that is prevailing is that, if a person obtains a PAN, he or she must statutorily file a return of income. There is no such requirement.

Q: I am 78 Years old and I have served the Indian Air Force for 37 years and is a recipient of pension. Will I continue getting my pension if I become an American citizen?

?Rattan Lal

Your change of citizenship has no impact on your right to get the pension, unless the rules governing your employment specifically bars foreign citizens from getting pension.

Note that such pension would continue to be taxed in India in spite of the change in your citizenship.

The authors may be contacted at wonderlandconsultants@yahoo.com