Updated: Oct 8, 2019
In this post, we will be discussing about how Income tax officer can forcefully add income earned by wife in husband's Income tax return or vice versa.
What is it all about?
As a tax planning measure, what one may purposefully do is split / transfer income to his/her spouse resulting in claiming double basic tax exemption limit of INR 2,50,000/- thereby paying less taxes.
Mr. X is a salaried employee with a pay package of INR 30 Lakhs P.A.
Wife of Mr. X is not a working woman.
With his monthly savings, Mr. X plans to invest INR 1,00,000/- in shares and trade to earn extra income. Lets say, he earns INR 15,000/- per month from shares buy/sell.
If Mr. X trades under his PAN, then this INR 15,000/-*12 = 1,80,000/- is taxable either @ 15% or 30%.
To save this tax, Mr. X plans to invest under his wife's PAN. Now he transfers INR 100,000/- every month to his wife's bank account and from there he buys/sells shares earning income of 1,80,000/-.
Now, Mr. X is under an assumption that since there is no other income for his wife, this shares income of INR 1,80,000/- being below basic threshold of INR 2,50,000/- is not taxable.
Why do people do this?
1. To pay lesser taxes.
2. To generate income in other PAN (which has no income) for future loan purposes.
(If no income then no loan)
This arrangement is most commonly seen between husband and wife.
What are the tax implications that people are unaware of ?
Such transactions / arrangements needs to avoided in totality.
There are enough rules in the income tax act, which allows the income tax officer to check the actual source of investment.
In our above example, income tax officer will compulsorily add such shares income in Mr. X PAN and then Mr. X will have to pay interest & penalty along with the applicable taxes
Please note - In some situations, penalty may be equivalent or more than the tax amount itself.
Bottom Line -
A person who has EARNED money is the actual owner of investment and income generated from such investment also belongs to the actual owner only.
Mere transfer of money, does not result in transfer of ownership over money.