How will my wife’s interest income be taxed?

livemint.com:

I wish to transfer ₹10 lakh to my wife’s account as a loan, and she wants to put ₹5 lakh in a fixed deposit and invest the remaining ₹5 lakh in mutual funds and stocks. In case my wife is unable to repay the loan and I decide to waive it off, will I be taxed for the interest income earned by my wife on all her investments? —Name withheld on request It is assumed that you have given an interest-free loan to your wife.

The Income-tax Act, 1961 provides for clubbing of income of an individual’s spouse, minor child, etc. As per the applicable provisions, while calculating your total income, any income (direct or indirect) arising to your wife, from assets transferred by you directly or indirectly to her, for inadequate consideration, should be included in your income.

In the instant case, you have provided an interest-free loan to your wife which is further invested by her in fixed deposits, mutual funds and stocks. At the outset, while a loan versus a gift can have different tax implications, where interest- free loans are advanced to a spouse, it is not free from doubt on whether income from investments made therefrom should be clubbed in the hands of the transferor spouse, even during the subsistence of loan.

In case your wife is unable to repay the loan and the same is waived off by you, the same is likely to be considered as transfer of assets to your wife for inadequate consideration. Thus, any income arising to your wife out of such funds invested shall be clubbed in your hands and included in your total income.

There is a view that any further reinvestment of the income from these investments by your wife should not be included in your income and should be taxed in her hands. My 62-year-old mom sold her land