When you transfer some amount in your wife’s account for meeting her personal expenses, etc and she uses the same as investments in assets, shares, funds or fixed deposits, then income generated from such assets or investments is chargeable to tax in your hands. These provisions are popularly known as Clubbing of income. Taxpayers divert their incomes to spouse just to evade tax and hence such diverted income gets added in the hands of taxpayer only and not his spouse.
Following example will make a picture clear-
Mr. A bought a house in the name of his wife Mrs. A; however all the payments has been made by Mr. A himself for purchase of that house. Mrs. A let out that house for Rs. 40,000/- as monthly rentals. In this case, rentals received by Mrs. A will not be chargeable to tax as her income but it will be clubbed in the income of Mr. A since he diverted his income to evade tax.
So without attracting clubbing provisions, taxpayer can save tax by transferring money to his spouse’s account. Yes, it may sound strange but you can save tax. Here’s how!
Suppose taxpayer gives a loan to his wife as per loan agreement between them. He also charges interest on said loan. Further taxpayer is showing interest received on loan as his income in Income-tax returns. In such case, amount given by taxpayer to his wife as loan will not be clubbed in his income.