Any transfer of assets to close relatives (parent, spouse, sibling, lineal ascendant/descendant) is not taxed.
Many people use this rule to transfer assets to others who are either in a lower tax bracket or do not pay tax at all and save tax on income from these assets.
To check this, Section 64 of the Income Tax Act contains clubbing provisions as per which any income from investment made or assets purchased in the name of close relatives (spouse, minor child or daughter-in-law) is clubbed with the income of the person making the investment and taxed accordingly .
This applies to all types of investments such as shares, fixed deposits, land, building, post office savings and mutual funds.
Further, income from assets transferred directly or indirectly other than for adequate consideration to a person or association of persons who may benefit the individual's spouse or son's wife is also clubbed with the transferer's earnings.
So, if a person opens a fixed deposit in his wife or minor child's name, the interest earned will be clubbed with his income. Also, if a person buys a property in the name of his wife, who has not contributed any money, the rental income will be clubbed with his income.
However, if the spouse/relative has a source of income and has bought the asset through his/her own funds, the income will be taxed in his/her hands.
If the property is bought from funds contributed equally by both husband and wife, and is held jointly, the rental income will be split and taxed separately.
Even in case of minor child, "if the income is from the child's own skills, manual work, etc, such income will be directly taxed in the hands of the child. All other income will be clubbed in the parent's hands. The parent may claim an exemption of Rs 1,500 per minor child if the clubbing provisions come into play," says Ghose.