Loan from wife for investment/trading in stock, legality and impact on Tax calculation.

Elimur Rahman (Consultant and Trustee in a TRUST)   (29 Points)

07 March 2021  

Let’s discuss the topic with an example: 

Suppose husband and wife both are employed and earning. Husband is interested in stock market trading and investment along with his employment. Husband needs additional fund for the same so taking loan from wife in order to meet his fund requirement. Say suppose Husband has taken 5 lacs of loan from wife with an Interest rate of 16% of interest (Considering the current unsecured loan interest rate in market). End of the year husband has earned Rs. 150000 from trading, Rs. 400000 from STCG Investment. Now, husband is liable to pay Rs. 500000 * 16% = Rs. 80000 as an interest to wife.

So, husband’s tax liability in this scenario is his SALARY INCOME + (Rs. 150000 (Trading Income) - 80000 (Interest Expense) = Rs. 70000) + Rs. 400000 (at a rate of 15% flat TAX to govt.)

Wife tax liability is SALARY INCOME + Interest Income

Questions:

1. Is this loan transaction is legal as per income tax?

2. Is the interest rate ok

3. Is there any cubing of income tax provision in applicable in this scenario

4. Is it ok to show interest charged by wife as an expense from husband’s income?