Last Updated:
To save tax, it is better to give an interest-free loan to the wife instead of a gift.
Gifts are tax-free under the Indian Income Tax Act.
Saving taxes is a priority for everyone, and the Indian Income Tax Act offers various methods to help reduce the tax burden. It is essential to understand these methods fully, as many tax-saving options come with specific conditions. One popular tax-saving method involves giving gifts to loved ones. Gifts are generally tax-free, but there is a catch—if the gift money is invested and generates income, the clubbing rule applies. Under Section 64 of the Income Tax Act, this income will be added to the giver’s income, potentially increasing their tax liability.
For example, if Lokesh gifts Rs. 6,00,000 to his wife, and she invests it in a fixed deposit (FD) that earns Rs. 5,000 in interest, the interest income will be added to Lokesh’s taxable income. This happens because Lokesh transferred the money without adequate consideration, and the income earned from the investment of this gift is considered as his under the clubbing rule.
There is a smart way to avoid this situation—by giving an interest-free loan instead of a gift. If Lokesh were to give his wife an interest-free loan rather than a gift, the income generated from the investment of this loan will be considered part of her taxable income, not Lokesh’s. This allows her to declare the income in her income tax return, effectively bypassing the clubbing rule.
This method is particularly beneficial if the wife plans to invest the money in a venture or for their children’s future. By structuring the money transfer as a loan instead of a gift, couples can legally avoid the clubbing of income, and the wife can retain the tax liability on any income generated from the investment.
While gifts between family members may be tax-free, the income earned from investing those gifts is subject to the clubbing rule. To save taxes legally, consider providing an interest-free loan instead of a gift, thereby keeping the investment income separate from the giver’s taxable income.
