Why gifting money to a spouse may not cut your tax bill

Section 64 aims to prevent taxpayers from unfairly reducing their tax outgo by transferring assets or income to specified family members who fall in a lower tax bracket. In simple terms, clubbing of income means that income earned by another person may be added to your taxable income in situations specified under the law. Not every income of every person can be clubbed randomly.

If your spouse receives salary, commission, fees, or other remuneration from a concern in which you have a substantial interest, that income will be clubbed with the income of the spouse whose total income is higher before clubbing, under Section 64(1)(ii).

One notable exception: if the spouse earns income through their own professional or technical expertise, and the income is solely attributable to their qualifications, knowledge, and experience, the clubbing provisions do not apply, according to a Cleartax report.

Another case where clubbing does not apply is when you invest in the Public Provident Fund on behalf of your spouse. Interest earned on PPF is exempt from taxes. Since there is an investment cap of ₹1.5 lakh per individual in PPF, you could open multiple PPF accounts in the name of your spouse or minor child to get this benefit.

The bottom line: gifting money to a spouse is tax-free. Investing it for them does not automatically make the returns tax-free in their hands. The tax department looks at who provided the capital, not whose name is on the account.