Transfer of money to spouse and its Tax implications.

When you transfer money to your wife’s account to meet her financial needs, for example, to help her start a business. This amount is considered as a loan if it is to be returned with interest. In case you are charging a reasonable interest and showing this as a source of income, the income earned by your wife may not be clubbed with yours.

However, the amount you loaned to your wife may be utilised to invest in shares to earn an income, and thereby you end up saving significant tax by avoiding clubbing of income (gains) on shares. Then, it may be hard to convince the tax authorities about the lender-borrower arrangement, given the close relationship of the parties and the tax savings involved. Usually, the provision is misused as a tax saving avenue and that is what the tax authorities want to be careful of.