Can transferring money to your spouse save tax? On the face of it yes, under Section 56(2)(x) of the Income Tax Act, 1961 gifts from a spouse are tax-exempt. But experts warn there’s a catch: the moment that gifted money begins earning interest or income, it gets clubbed back to you under Section 64, undoing any benefit.
Because of this rule, even if you deposit a large sum to your wife’s account and let it sit or invest it the returns (from FDs, dividends, rents, etc.) are taxed as if they are your income again. That means no real tax saving.
The short version, gift is fine, earning income isn’t
So yes, gifting money to your spouse is legal and tax-free at the moment of transfer. But the moment that money generates income, it legally becomes yours again for tax purposes. The so-called tax hack turns out to be no hack at all.
However, if your spouse invests gifted money in truly tax-free instruments like certain government savings schemes or other exempt vehicles, the clubbing rules don’t matter, because the income itself is exempt. That might offer a legitimate way to use a gift without tax consequences.
Don’t expect tax breaks by just gifting
In all, transferring money to a spouse with the sole motive of saving tax isn’t effective under current Indian tax law. You can gift freely but unless the money lies idle, or goes into tax-free tools, the returns are still yours and taxable.
If you’re trying to plan smarter financial moves, it’s important to know the difference between a gift and a source of income.