A number of our clients want to invest their funds in the names of their spouses or children. This blog examines the taxation and other aspects of investing in the names of your family members.
India has a slab based tax system. Currently, there is an old and new tax regime. The old regime has a 30% tax rate above an income of Rs ten lakhs whereas in the new regime, the 30% rate kicks in above an income of Rs twenty four lakhs. Therefore, for the heads of family any investment income will likely be taxed at the maximum rate of tax of 30% and accordingly, they feel that the same can be reduced or eliminated if the investment is made in the name of the spouse or the minor child.
The income tax act has clubbing provisions which come into play in such scenarios. While transferring assets or funds to the family members is not taxable in their hands, the income earned from the same is added (clubbed) to the income of the head of the family. Accordingly, it may not be possible to avoid or reduce the tax burden by making investments in the name of your spouse or minor child. Therefore, income earned in the form of interest on Fixed Deposits, rent from apartments or offices, capital gains from the sale of shares or mutual funds, etc will be added to the income of the transferor of the funds/assets.
In case the spouse is also working and the income is earned by the minor child/children, then the income of the minor children will be clubbed with the income of that parent who has higher income. The clubbing provisions apply to a minor child only and not to a major child.
The other aspect that needs to be considered is that if you are investing in a mutual fund in the name of a minor child, then one parent has to operate the mutual fund account as a Guardian. However, once the child crosses the age of 18, the account will be frozen by the AMC until the formalities are completed to transfer the account to the name of the child. The PAN, bank account, etc of the child along with KYC will have to be completed and provided for the transfer to take place. Once the account is transferred to the name of the child, the parent will not be able to operate the account.
Accordingly, do keep the above considerations in mind while transferring income or assets to the spouse or child.
About EquiZen
EquiZen, a registered mutual fund, SIF (ARN-272487 – Sanjay Parikh) and PMS distributor (APRN-00158), offers personalised financial solutions with a focus on safety and transparency. We aim to assist you to achieve financial freedom, the freedom to do what you want and achieve your dreams. We do not push financial products but believe in utilising them judiciously to meet your needs. Learn more at www.equizen.in or contact us via +91 9820605203 or sanjay@equizen.in.
