Tax implication in transactions between spouses

livemint.com:

Many people hold a common misconception that transactions between spouses are entirely exempt from tax implications. The reality is more nuanced. While certain provisions exist to prevent the imposition of taxes on asset transfers between spouses, there are also regulations in place to deter the misuse of these exemptions for tax evasion. To ensure accurate income tax computation and reporting, individuals must be aware of both sides of this coin.

Exchange of funds: Funds exchanged for everyday household expenses are standard practice among spouses. However, it is essential to differentiate between routine expenses and transfers of cash designated as gifts or investments, surpassing the scope of typical household disbursements. According to income tax regulations, transfers as gifts between spouses are exempt, meaning these transfers are not categorised as taxable income for the recipient. However, any income generated from the utilisation of such transferred funds may be considered as income in the hands of the donor.

For instance, if a husband owns a rental property and instructs the tenants to pay the rental income to his wife, as per the clubbing provisions of the Income Tax Act, this rental income would still be taxable in the hands of the husband, not his wife. Not only that, if the wife chooses to invest this money in a fixed deposit, the interest earned also would be taxable in the hands of the husband and not the wife. Or, if she uses the funds to buy stocks, the capital gains arising on the sale of the stocks will be taxed in the husband’s hands.

When you extend a loan to your spouse: Income tax laws do not impose restrictions on individuals providing loans to their spouses. However, it is advisable to ensure