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 alongwith the specified rate of interest. Both should sign it and date it. This is just for record purposes. No other paperwork is required.

Gift to family

The same strategy can be executed in the case of non-earning family members too. For example, if your children are major (above 18 years of age), or if you have non-earning parents, you can simply gift them your capital and earn income in their name.

Gift to minor children

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.

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.

To Conclude

This then wraps up the broad thrust of the queries posed. However, if some niggling doubts still remain, please feel free to write.

The writer may be contacted at shanbhag@vsnl.net