27 November 2009
I am a salaried person with good income. I have saved some money and intend do so the following:
1. Loan a amount of Rs 5 lacs to my wife at a interest rate of 10% 2. My wife gives the amount as loan to a friend who gives her 20% return. 3. My wife pays tax under "income from other sources" on (20%-10%)= 10% of the capital 4. I pay tax on the 10% recieved from my wife
My questions are: 1. Is giving a loan to wife legitimate? 2. Do the provisions of gift tax apply? 3. Does cliubbing of income apply? 4. What documentation do I need to do from an income tax point of view
28 November 2009
It is to be seen that what is the adequate consideration here. If 10 % is the average market rate of interest, then clubbing provisions would not attract as the asset (Loan amount) was transferred with adequate consideration. However, if market interest rate is 20 %, then it will be prima facie seen that asset was transferred for breaking up of taxable income.
Experts, pls do comment on it & make it open untill fully resolved.
28 November 2009
The idea here is to break up the taxable income, but that is a moral point rather than legal. I guess it is fine bt the IT department till as you said the "consideration" is adequate.
My wife may be able to generate more, like 30% or so on it. and the only reason to gve her loan is to make it taxable to her. I can take 15% rather than 10% from her to make it look more real?
28 November 2009
Q 1 : You can give loan to your wife. Valid under law of income tax.
Q 2 : It will not treated as gift so long as you show in your assets and she shows her liability to you in the IT records till the amount is returned to you.
Q 3 : Clubbing provisions will not apply so long as you can prove that she is doing money lending business and since you are an employee you do not have time to do on your own.
Q 4 : Doumentation is you collect a pronote from your wife. And she will also collect pronotes from the loanee of her. Then all communications should be signed by her.
28 November 2009
I can only suggest substance over form. If the AO is the same, no matter how many documents you put in to make the transaction look legal, he is going to conclude that you have routed the transaction this way to divide the income. After the assessment order is passed you can deposit 50% tax and go into appeal. In the past 25 years I have seen half a dozen such instances and no one appealed. Choice is yours. You may get away with it as long as your case does not come up for scrutiny. If any of your case is picked up in CASS then bad luck. Even if the AO is not the same, if the wife's friend's case is under scrutiny then also the trouble can start as normally for such loan transactions AOs do verify identity. They also verify lenders pass book to see that no cash is deposited and at that time the source of lender will also surface.
What CA Rishabji has stated is a fact and is hitting the nail on the coffin. AO can just safely assume that 20% is the market rate of interest and the loan to wife is not given for adequate consideration. You will really find it difficult to argue your case and it will not be worth it to go in for appeals. Better find some other legitimate way to pass on income to your wife.
Anchitji, 30 % interest received by your wife can be construed as other than adequate consideration. RBI will definitely send ED to your doorstep as you do not have license for money lending and charging such a high interest will invoke provisions of AMLA for you if done in large amounts. I am quite surprised that experts are suggesting to you ways of evasion knowing fully well that they themselves can get into problem for making suggestions for evasion. Today in addition to the professional CAs, even employees or other persons can be prosecuted for suggesting and abetting evasion. There is a very thin line between evasion and avoidance of tax. Do not get on to the wrong side of the line.
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