‘Don’t just gift it, loan it’: CA shares high income tax hack to cut tax outgo

When high-income earners in India make large financial moves within the family, the tax implications can be far bigger than most realise. A recent case study highlights how the choice between gifting money to a spouse or structuring it as a loan can mean the difference between a hefty tax bill—and significant savings.

“Most people think tax planning is just about deductions or investments,” said Sk Md Affan, a CA Intermediate from Asansol, West Bengal. “But smart structuring of family transactions can save lakhs in taxes for high-income individuals.”

Consider Rahul, who earns Rs 40,00,000 a year, and his wife Priyanka, a sole proprietor in the fashion business. They need Rs 50,00,000 to expand Priyanka’s business in FY 2024-25. Their choice between two funding routes—an outright gift or a structured loan—illustrates how tax laws under the old regime can shape financial outcomes.

Option A: Direct Gift

Rahul could simply gift Priyanka Rs 50,00,000, which she’d invest in her business. While gifting between spouses isn’t taxed directly, there’s a catch. Under Section 64(1)(iv) of the Income Tax Act, any income generated from assets gifted to a spouse is “clubbed” with the giver’s income.

“In Rahul’s case, Priyanka’s Rs 15,00,000 business profit gets added to his salary income,” Affan explained. “That pushes Rahul’s total taxable income to Rs 55,00,000.”

Under the old tax regime, Rahul pays tax of Rs 14,62,500, plus a 10% surcharge of Rs 1,46,250 because his income crosses Rs 50 lakh. With a 4% health and education cess, his final tax bill comes to Rs 16,73,100. Priyanka, meanwhile, has no tax liability on the business profit since it’s fully clubbed with Rahul’s income.

After paying taxes, the couple’s net cash in hand is Rs 38,26,900.

Option B: Intra-Family Loan

Instead of a gift, Rahul could lend Priyanka Rs 50,00,000 at a fair interest rate of 10%. Priyanka invests it into her business, earning Rs 15,00,000 gross profit. After paying Rs 5,00,000 in interest to Rahul, her net business profit stands at Rs 10,00,000.

“This changes the entire tax picture,” Affan pointed out. “Because the loan involves adequate consideration—in this case, a fair interest rate—Priyanka’s income is not clubbed with Rahul’s.”

Here’s how the taxes break down under Option B:

Rahul’s income is Rs 40,00,000 salary plus Rs 5,00,000 interest income. His total taxable income is Rs 45,00,000. Under the old tax regime, his tax is Rs 11,62,500. There’s no surcharge because he stays below Rs 50 lakh, and a 4% cess adds Rs 46,500, bringing his total tax liability to Rs 12,09,000.

Priyanka pays tax on her Rs 10,00,000 net profit. Her tax is Rs 1,12,500 plus a 4% cess of Rs 4,500, totaling Rs 1,17,000.

The couple’s net cash after taxes under Option B is ₹41,74,000, leaving them ₹3,47,100 better off than with a direct gift.

“The difference is significant,” said Affan. “High-income taxpayers should remember that gifting to a spouse often triggers clubbing provisions. But a properly structured loan avoids clubbing and allows both partners to use lower tax slabs.”

Affan stresses that compliance is key. “The loan must be documented, carry a reasonable interest rate, and the interest must actually be paid. The tax department will scrutinise any transaction between spouses, especially involving large sums.”

Ultimately, tax planning for high earners goes beyond deductions and exemptions. “It’s about understanding how to move money within the family efficiently,” said Affan. “A few smart steps can mean huge savings.”

For high-income couples like Rahul and Priyanka, the choice between gifting and lending isn’t merely personal—it’s a tax strategy that can preserve hard-earned wealth.