Simplifying Tax for C.A's and Taxpayers
“Marriage is but a consolidation of resources. “ P.S. Plan your and your spouse taxes

“Marriage is but a consolidation of resources. “ P.S. Plan your and your spouse taxes

Ideally two incomes mean twice the opportunity. When both spouses have income sources, this definitely adds strength to financial fiber of the family. But all you need to do is to understand and plan properly to reap benefits from this advantage.

This article attempts to provide you with an overview of the income planning measures, though remember one size never fits all. Work out the best for you and make the most out of it.

  • Gain from husband and wife falling in different tax brackets

From A.Y. 15-16, the income tax slab is same for man and woman tax payers. But still if you fall in different tax brackets, there is lot to take advantage from the same.

To understand, let us look at the below mentioned example:

A1

As we can see that husband is paying a comparatively higher tax owing to being in higher tax bracket, it becomes necessary that in case, husband has insufficient investments to fully meet his limit of Rs 1,50,000 (as in Case II), then the investments made should be used for a claim by him to pay less taxes (as in Case I) altogether.

Also, where you have made investment more than what is permissible allowable deduction under income tax law, it would be better to get it claimed by the other spouse.

  • Using LTA benefits

As per the current rules, LTA (Leave Travel Allowance) benefits can be claimed twice in a block of four calendar years. While claiming LTA, spouses should claim exemption alternately each year. This way, together they can claim an LTA exemption of four journeys in a block of four years. There is no need for them to take the precaution of not travelling twice during the same year.

  • HRA exemption benefits

Consider splitting your rent with your house to optimize your HRA exemption.

Legal Position:

While calculating HRA exemption, the employer considers the least of the following amounts:

  1. Actual HRA received
  2. Rent paid above 10% of salary
  3. 40% of Salary* (50%, if house situated in Mumbai, Calcutta, Delhi or Madras)

An individual can claim the entire HRA as exemption if the rent paid works out to at least 50% of the basic pay in metros, and 40% otherwise. In other cases, the exemption will be less than the actual HRA component of the salary, implying that the tax savings will also be less.

Consider the following example:

AA1

Untitled-1

Clearly the tax payout is less when splitting of rent is done to claim HRA. But the important point to remember is the proportion of splitting to maximize the benefit:

  • In case couple is in the same tax slab and one partner is eligible for higher HRA, we have observed through different permutations and combinations that it would be more tax-efficient for partner receiving higher HRA to split rent maximum up to:
  • Lower of  (i) HRA and (ii) 50% of basic ( in case of metros) or 40% of basic (in case of non-metros)  PLUS
  • 10% of Basic salary of either person.

Continuing the same example, consider the following scenarios, result would be:

 Untitled-2

Hence it is clear that up to that limit, the benefit will be maximized.

In case the couple is not in same tax slab, the partner in the higher tax slab should ideally claim a larger chunk of the rent paid for exemption. The rent should be split in such a way that the spouse in the higher bracket pays (HRA or 40%(non-metros)/50% (metros) of Basic whichever is lower plus 10% of salary) received by him as rent and the balance rent is paid by the person in the lower tax bracket. This will help maximise the HRA exemption for the spouse in the higher tax slab. Continuing with the same example, let us understand it:

Untitled-3

But there are few practical hurdles involved. To claim the HRA exemption, both partners need to show a rent receipt in their name. This can either be two different receipts with respective amounts or a single receipt for the full amount bearing both names. In the latter case, legally you are free to claim exemption in any proportion.

A rent receipt may not be enough. It will suffice at the time of claiming HRA exemption from your employer, but if the AO picks up your income tax return for scrutiny, both partners must be in a position to prove actual payment of the rent amount claimed. This is not a problem where both partners are paying their share separately to the landlord. But in many cases, one of the partners is likely to make the entire rent payment to the landlord. In such a scenario, the spouse can pay his/her share to the other, who can in turn pay the entire sum to the landlord. The only issue is that such a transfer to the spouse should be in the form of cheque or bank transfer, not cash.

Please refer our following article to know more on HRA:

http://taxingtax.com/living-rented-house-know-related-tax-provisions-exemptions/263

  • Medical reimbursementsIf you produce an actual bill of medical expenses, this allowance becomes tax-free subject to Rs 15,000 in a financial year. You can give receipts of medical expense of your dependents as well. It is advised to claim bills by the spouse that falls in higher tax bracket.
  • Meal couponsMeals coupons received from employer are exempt upto Rs 3000 per month. Based on your monthly grocery and food expense, both of you can adjust your allowance in food coupons to save tax.
  • Joint Home LoanWhen seeking a home loan, it is advantageous for couples to opt for joint loans. By this, spouses can individually claim a maximum deduction of Rs 1.5 lakh on the principal repayment and Rs 2 lakhs on interest payment, for the same home loan. Thus, together the couple gets to claim Rs 3 lakh principal repayment and Rs 4 lakh interest repayment. The income tax benefits are applicable in proportion to the ownership structure. For example, if the ownership in a property is 50:50, the loan amount will split accordingly and this ratio will be applicable while calculating tax benefits on interest/principal repaid on this loan.
  • Create an HUFStarting an HUF can prove to be quite a saving. Any income received by an individual as a member of a HUF (Hindu Undivided Family) is taxable only in the hands of the HUF and not in an individual capacity. The HUF income has the same slabs and exemptions as for an individual. Though an HUF, couples can get an additional, separate exemption of Rs 2, 50,000 for the AY 2016-17.

Claim deductions from business Income

  • In case your spouse is not in the income tax bracket or at the lower tax bracket, following tips might help you:
    • Employ your spouse in your firm and paying salary

    You can employ your spouse in your firm based on their qualifications and experience and pay salary. Consequently, your spouse will have an income source and you can claim the salary as business expense. But remember to make payment by cheque to ensure its genuineness.

    • Paying rent to spouse for business carried out in spouse owned property

    You can carry out your business in your spouse owned property and claim rent paid as rent expense.

  • Invest in the name of spouse who is in lowest tax bracket.It is always preferred to invest money in the name of spouse who is in low tax bracket.  For e.g. if A and B are working couple and A is in 20% bracket and B is in 10% bracket. If A can plan well, he can spend money for general expenses from his account and balance he can invest. On the other hand, entire income of B can be invested in investment options like FD etc. This way it would attract 10% income tax or maximum it would spill over to 20% tax bracket to some extent.
  • Invest through your spouse or childrenUnder Sec 56 of the Income tax Law, you can gift any amount of money to your spouse or children without attracting tax.But income generated from the gift given to spouse if invested is clubbed in hands of the transferor. For e.g. if you gift your spouse Rs.2 lakhs, it will not be taxable. But if your spouse invests this amount, say in a fixed deposit at 10 % p.a., the interest of Rs. 20,000 will be clubbed to your income and taxed as per your slab.  However the income earned on income reinvested, is not clubbed.

    Further the income of minor child is clubbed in the hands of parents subject to few exceptions.

    To make best of the gifting provisions as well as clubbing provisions, following tips are recommended:

    • Invest the gifted money into tax-exempt investments like PPF, shares of a listed Company, ELSS mutual fund, tax free bonds etc.

    Since interest income on PPF, long term capital gain on listed shares and ELSS are exempt from tax, even if they are clubbed won’t add to any tax liability of the transferor and any further investment of such amount would be treated as spouse income and you might pay less income tax based on tax bracket of your spouse.

    • Consider Giving a Loan to your Spouse or Child instead of a gift

    Clubbing Rules does not apply for genuine loans given to your spouse or child. So instead of just gifting some money or doing investment on their name, give loan to them which they can use to invest them self.

    E.g. consider giving a loan to your wife to buy a house rather than gifting money to invest in it. In exchange, she can make payments at reasonable rate of interest or give you her jewelry. All the income from those investments will not be clubbed in your income. Make sure that you have a documentary proof of loan. A simple letter of loan with signatures of both the party will be enough as documentary proof, no need to run for lawyers for these.

    • Invest money in the name of minor child only in tax-exempt investments

    Since income of minor child is clubbed in the hands of parents, it is always advisable to invest money in their name only in tax exempt investments.

    • Gift your major children and then invest through them.

    In case you have children who are 18 years or older who are either studying or earning at a lower tax slab than you, then gifting your surplus money and investing in their name will neither attract gift tax nor clubbing of income will apply. Income earned out of investments made by your major children out of the gifts given by you will be taxed in their hands only. This is really a great thing if you are going to pay for some upcoming children education goal or marriage goal.

    Hope you find this article useful. Post in your queries, if any. You can also refer our following articles:

    http://taxingtax.com/computing-salary-income-tax-law-treatment/250/

    http://taxingtax.com/keep-few-things-in-mind-while-changing-jobs/280/

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