Question 1

What is income splitting and how does it reduce taxes?

Accepted Answer

Income splitting is a tax planning strategy where income is distributed among family members who are in lower tax brackets. Since India has progressive tax slabs, splitting Rs 20 lakh among 4 members (Rs 5 lakh each) results in much lower total tax than one person paying tax on Rs 20 lakh. Each person gets their own basic exemption limit (Rs 3 lakh), standard deduction (Rs 75,000), and access to lower tax slabs.

Question 2

What is Section 64 clubbing and how can I avoid it?

Accepted Answer

Section 64 of the Income Tax Act 'clubs' back income transferred to spouse or minor children without genuine consideration. To avoid clubbing: (1) Pay family members only for actual work performed, (2) Keep compensation at arm's length (market rate), (3) Maintain proper documentation like contracts, timesheets, and work samples, (4) Make payments via bank transfer, not cash, and (5) Income to minor children from parents is always clubbed unless earned from their own skill/effort.

Question 3

Can I pay salary to my spouse or parents for content creation work?

Accepted Answer

Yes, you can legitimately pay salary to family members if they perform genuine work for your content creation business. Common roles include video editor, social media manager, accountant, or business manager. The salary must be reasonable (arm's length) for the work performed. Maintain employment contracts, job descriptions, and proof of work. The salary becomes a business expense for you and taxable income for them at their (typically lower) tax rate.

Question 4

What documentation do I need for income splitting?

Accepted Answer

Essential documentation includes: (1) Written employment contracts specifying role, responsibilities, and compensation, (2) Job descriptions for each family member, (3) Timesheets or work logs, (4) Work samples and deliverables, (5) Bank transfer records (no cash payments), (6) PAN and Aadhaar of all family members, (7) TDS compliance if salary exceeds Rs 2.5 lakh, and (8) Form 16 for salaried family members.

Question 5

How much can I save through income splitting?

Accepted Answer

Savings depend on your income level and number of family members. For a content creator earning Rs 20 lakh, splitting income among 3 family members can save Rs 1-3 lakh annually. Each member gets: (1) Rs 3 lakh basic exemption, (2) Rs 75,000 standard deduction (salaried), (3) Section 87A rebate making income up to Rs 7.75 lakh effectively tax-free under new regime. With 4 members, you could potentially have Rs 31 lakh (4 x Rs 7.75L) tax-free!

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