"Fringe
Benefits of Marriage".
The concept or the mechanics of the tax
planning strategy.
Loan to spouse
The idea here is to make the non-earning spouse earn an income up to the
maximum amount not chargeable to tax. In the case of ladies, now, it is Rs.
1.35 lakh. So the amount to be transferred to your wife should be such that she
earns up to Rs. 1.35 lakh from it. At the rate of say 8%, this amount comes to
over Rs. 16 lakh. In other words, she can earn interest on any amount up to Rs.
16 lakh and not pay tax on the same. Remember, you are in the highest tax
bracket. So instead of transferring it in her name, had you invested the money
yourself, the Rs. 1.35 lakh that you would have earned would be taxable @33.66%
in your hands.
Now you can effect a transfer to
your wife in two ways. One is by giving her a gift. However, this route doesn’t
work as the Income Tax Act specifies that any income that she earns on
money gifted by you, though received by her, would be taxed in your hands. So
the purpose isn’t served. That’s why, you should give her a loan at a very low
rate of interest. True, the interest that she pays you would be added to your
income and taxed in your hands. However, the idea is to use the spread between
what she earns (which is tax-free) and what you earn from the loan (which is
taxable).
Also, the loan is given to her
from your after-tax income. So there is no question of showing it in your tax
returns. In any case, you are mentioning the same information in terms of
including the interest that you receive from her under the head Income From
Other Sources in the Return. Also, the paperwork for the same is simple. On a
piece of paper, just mention the fact that you are giving her a loan along with
the specified rate of interest. Both should sign it and date it. This is just
for record purposes. No other paperwork is required.
As per the Income Tax Act, all income of minor children is
to be clubbed (added) to the income of that parent whose total income is
higher. Therefore, it doesn’t matter whether you give your child (children) a
gift or a loan, the income would be clubbed in your hands.However, the Act
allows a deduction from such clubbed income up to Rs. 1,500 per child. My point
in the article was that say you have two children, Rs. 3,000 would be exempted
in your hands. Therefore, give a gift to your children in such a way that they
earn Rs. 3,000 from such gifted amount. It will be added to your normal income,
however, the specific exemption means income on over Rs. 40,000 becomes
tax-free.
Housing Finance
This proved to be another area where large scale confusion prevails. Tax
breaks are available on loan taken to buy the house. That means the asset has
to belong to the person who intends to take advantage of the tax breaks. So if
the house is in the name of the wife but is being financed by EMIs paid from
the husband’s bank account, there arises an anomaly. The husband is paying for
something that does not belong to him. The same principle is applicable even if
the house is in joint names but the entire EMI comes from the husband. In this
case too, the husband pays for 50% of an asset that does not belong to him.
Therefore it is best to have separate joint accounts. Co-own the house in equal
shares. Pay the interest and principal equally and this way each one is
entitled to a maximum of Rs. 1.5 lakh on interest payments and Rs. 1 lakh on
principal payments making it a total of Rs. 5 lakh.
Coming to the next part of the question, the deductions are applicable to the
owner of the property in proportion to the share of the ownership. This share
is a derivative of how much of your own funds you have brought in (personal
equity) and how much you have taken as a loan. For example say, the house costs
Rs. 30 lakhs. Say you bring in Rs. 10 lakhs of your own funds and take a joint
loan with your wife of Rs. 20 lakh. Remember, since both of you own the house
50:50, your individual ownership in the house would be Rs. 15 lakh each. Now
lets see how the numbers work out.
|
|
Husband (Rs lakhs) |
Wife |
Total |
|
Cost of the house |
15 |
15 |
30 |
|
Husband’s own contribution |
10 |
0 |
10 |
|
Share in the loan (balancing figure) |
5 |
15 |
20 |
In the above case, of the total EMI, the husband would be entitled to one-third
the benefit and the wife would be entitled to two-third the benefit. The 1:3
ratio has resulted because of the husband’s own contribution. Therefore, it
follows that if the entire amount of the cost of the house was taken as a loan,
then the EMI deduction would be shared equally.