Can you save tax by using your wife’s bank account for investing in mutual funds and stocks?

Trying to save tax by investing in mutual funds and stocks in your wife’s name or investing after sending money to her bank account? It will not work, as per the Income Tax rules.

The Income Tax rules have a concept of ‘Clubbing of Income’ wherein if the income of one person is included in the income of another person then the latter becomes subject to tax on such clubbed income.

“In order to curb tax avoidance practices, the concept of “Clubbing of Income” was introduced under the Income Act, 1961 (hereinafter referred to as ‘IT Act’), where the income of one person is included in another person’s income and the latter would be subject to tax on such clubbed income,” says Dr Suresh Surana, Founder, RSM India, a tax consultancy firm.

Let’s understand this with two examples.

Example 1: Suppose a man transfers money to his wife’s account. The wife is a homemaker, who invests the money sent by her husband in mutual funds and stocks in her own name.

According to the expert, Section 64(1)(iv) of the Income Tax Act provides that if an individual directly or indirectly transfers his/her asset (which may be cash/ money transfer) to their spouse, then income arising on such asset will be clubbed with the income of the individual (i.e., transferor).

“Therefore, in a given case where a man transfers money to his wife’s account, which is subsequently invested by her in mutual funds or stocks in her own name, any income arising in the nature of dividend or interest or capital gains arising on account of transfer of such stocks and mutual funds, will be clubbed with the income of the man (i.e transferor),” Dr Surana says.

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Example 2: Suppose the man sends his money to his wife’s bank account. He then invests this money in mutual funds and stocks through his wife’s account in her name.

In this case, the income arising from the sale of such assets or capital gains would also be clubbed with the income of the man.

“A man directly investing his money in his wife’s name would attract clubbing provisions u/s 64 of the IT Act as well and hence, any income arising from such assets or capital gains arising on account of the transfer of such assets would be clubbed with the income of the man (i.e transferor),” says Dr Surana.

When the ‘Clubbing of Income’ provision doesn’t apply?

The clubbing of income provision will not apply if such transfer of assets is made against adequate consideration or as a part of a divorce settlement or under an agreement to live apart.