In this article, we will discuss about...
Introduction
Many NRIs make a common mistake that seems small but can cause big tax problems later. I’d say around 99% of NRIs make this error. In this article, I’ll explain what this mistake is, why it happens, and how you can avoid it.
Why read when you can watch the video?
What Is the Mistake?
Most NRIs make the mistake of investing money or buying property in their spouse’s name. At first, this seems like a smart idea. When someone moves abroad for work, the spouse often stays in India, so it feels easier to transfer money or buy property in the spouse’s name.
Why Do NRIs Make This Mistake?
The main reason is convenience. Two factors make this mistake common:
- Ease of Compliance: NRIs face more complicated tax rules than residents of India. It’s easier for the spouse (who’s still a resident) to handle investments and property because they have fewer tax requirements to follow.
- Physical Presence: NRIs can’t always be in India to sign papers or manage property. By putting investments and property in the spouse’s name, the spouse can handle everything locally without the NRI needing to be there.
There’s no bad intent—people do this to make things easier for their spouse. But this convenience can lead to unintentional tax mistakes.
How This Small Mistake Becomes a Big Problem
Here’s the problem: Many NRIs think that since they are sending money from abroad and the investments are in their spouse’s name, they don’t need to worry about the tax on that income. This is a big misunderstanding.
Some NRIs don’t file tax returns for their spouse because they believe the income is exempt due to their NRI status. Others assume the income belongs to the spouse and file returns in the spouse’s name. This is incorrect.
What the Tax Laws Say
Section 64 of the Income Tax Act says that if you transfer money or property to your spouse without receiving anything in return, the income from that money must be added to your income, not your spouse’s.
So, if you transfer money to your spouse to buy property or make investments, the income from those investments must be included in your tax return, not your spouse’s. This is known as the clubbing provision. Failing to report this can cause serious tax problems.
Tax Trouble for NRIs
For NRIs, the problem is worse because the tax department can investigate unreported income for up to 16 years. For residents, the period is only 3 to 7 years.
If you’ve been investing or buying property in your spouse’s name for years without reporting the income, you could still get a tax notice, even after a decade.
For example, if you bought property in your spouse’s name 10 years ago and have been receiving rental income, the tax department may ask where the money came from. You’ll need to explain that it was your money, meaning the rental income should have been reported under your name for the past 10 years. This can lead to large penalties and back taxes.
The Misunderstanding About Paying More Taxes
Many NRIs think reporting income in their own name will lead to higher taxes. But that’s not always true.
In India, if your total income is below ₹2.5 lakh, it’s tax-free. Whether the income is reported under your name or your spouse’s, the tax may be zero. The problem only arises when the income is misreported or not reported, which can lead to penalties.
The Simple Solution
Luckily, there’s an easy way to fix this. Instead of transferring money or property to your spouse’s name, create a power of attorney. This allows your spouse to handle all your financial matters in India, like signing rental agreements or opening accounts, but everything stays in your name.
With a power of attorney, all transactions are legally done under your name, and the income is correctly reported. This eliminates the need for the clubbing rule and keeps you in line with tax laws.
A power of attorney can be valid for up to five years or until you cancel it, making it a simple, long-term solution.
Other Tips to Stay Compliant
Here are some additional tips to help you avoid tax issues:
- If you buy property, you can name your spouse as a co-owner, but make sure any income (like rent) is reported under your name.
- Apply for a lower TDS rate if your tax liability is small. This helps you save money while following tax rules.
- Always report capital gains or income on your tax return, even if you and your spouse jointly own the asset.
Conclusion
If you’re an NRI and you’ve been making this mistake, it’s time to stop. By using a power of attorney and reporting income in your name, you can avoid the tax troubles many NRIs face. This simple step will help you manage your investments and property in India while staying compliant with tax laws.