Learn why gifting money to your spouse in India may cost you more in taxes under clubbing provisions. Discover legal loan strategies to save more tax.
Why Gifting Money to Your Spouse May Cost You More in Taxes — And What You Can Do InsteadQ1: Is gifting money to my spouse tax-free in India?
Yes, under Section 56(2) of the Income Tax Act, gifts to your spouse are not taxed in their hands. But Section 64(1)(iv) — the clubbing provision — applies, meaning any income earned from that gift is added back to your income and taxed accordingly.
Q1: Is gifting money to my spouse tax-free in India?
Yes, under Section 56(2) of the Income Tax Act, gifts to your spouse are not taxed in their hands. But Section 64(1)(iv) — the clubbing provision — applies, meaning any income earned from that gift is added back to your income and taxed accordingly.
Example: Rahul gifts ₹50 lakh to wife Priyanka. She invests it and earns ₹5 lakh. That ₹5 lakh gets clubbed with Rahul’s income — increasing his tax bill.
Q2: The smarter way — Loan, not Gift
➡️ Lend money at a reasonable interest rate instead of gifting.
➡️ Loans are considered transactions with “adequate consideration,” so clubbing rules don’t apply.
Benefit: Both spouses can use separate tax slabs reducing the total family tax burden.
Q3: How much difference does this make?Scenario Gift ₹50L Loan ₹50L @10%Returns ₹5L clubbed Rahul: ₹5L interest, Priyanka: ₹10L returns
Combined Taxable Income ₹55L Rahul ₹45L + Priyanka ₹10L
Total Tax ₹16.73L ₹13.26L
Net Cash Retained ₹38.26L ₹41.74L
Returns ₹5L clubbed Rahul: ₹5L interest, Priyanka: ₹10L returns
Combined Taxable Income ₹55L Rahul ₹45L + Priyanka ₹10L
Total Tax ₹16.73L ₹13.26L
Net Cash Retained ₹38.26L ₹41.74L
Savings: ₹3.47L with loan strategy
Q4: What is income clubbing?
It’s a tax rule to prevent income splitting. If you transfer assets to your spouse without fair payment and they earn income from it, that income is taxed as yours.
Q5: How to make the loan tax-compliant?
✅ Draft a formal loan agreement (amount, rate, tenure, repayment)
✅ Use a reasonable market interest rate
✅ Pay interest regularly via bank transfer
✅ Declare interest income in your ITR for authenticity
Q6: Key takeaway for smart tax planning
Beyond Section 80C deductions — it’s about structuring family money flow to keep more after-tax income legally.
Q7: Does this only work in the old tax regime?
The example uses the old regime with slabs, 10% surcharge (above ₹50L), and 4% cess. Under the new regime, numbers differ, but the concept still works.
Q8: High-income family benefits
Lower tax burden
Better control
More cash retained
Quick RecapStrategy Gift to Spouse Loan to Spouse
Strategy Gift to Spouse Loan to Spouse
Tax on Returns Clubbed Taxed to borrower
Tax Benefit None Yes
Documentation Not needed Must-have
Best for Small sums High-value transfers
FAQs – Gifting Money to Spouse & Clubbing Provisions in India
1. Is gifting money to my spouse tax-free in India?
Yes, gifts to your spouse are exempt under Section 56(2) of the Income Tax Act. However, under Section 64(1)(iv), any income earned from that gift is added to your income through clubbing provisions and taxed in your hands.
2. Can I avoid clubbing provisions legally?
Yes, by lending money to your spouse at a fair interest rate instead of gifting. A formal loan agreement ensures it’s treated as a genuine financial transaction, avoiding clubbing.
3. What is the ideal interest rate for a spouse loan?
Use a reasonable market rate, generally between 6%–10%, to ensure it reflects a fair transaction and passes scrutiny during a tax audit.
4. Can this loan method work in both old and new tax regimes?
Yes. While exact savings will differ due to slab changes, the principle of splitting income between spouses to reduce tax liability works under both regimes.
5. Do I need to report interest income from a spouse loan in my ITR?
Yes, you must declare the interest received in your return under “Income from Other Sources” to keep the transaction tax-compliant.
6. What if my spouse invests in tax-free instruments after receiving the gift?
If the gift generates tax-free income (like PPF interest or tax-free bonds), there’s no additional taxable income to club. But if reinvested in taxable sources, clubbing applies.
7. Can I give multiple small gifts instead of one large sum to avoid clubbing?
No. The clubbing provision applies to all qualifying gifts, regardless of size or frequency, if given without adequate consideration.
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