Business

Take loan instead of money handout from spouse to fund new business: Here’s why

fund-raise-1Maria is 40. She worked in advertising before giving it up to get married. She is now the mother of two grown up children. She wants to start her own business and is keen to take up assignments and projects. She is thinking of asking her husband to fund her business initially. However, she is not sure that is the best way to fund the business. She wants to know what other options she could consider.

Maria and her husband Mahesh must consider the provisions of clubbing of income under the Income Tax Act before deciding to fund the new venture. If Mahesh provides the money Maria needs, it will be considered a gift. Any profits that the business makes will continue to be considered as her husband’s income and not Maria’s. It will be added to his total income and taxed at the marginal rate of tax applicable to him. This would mean taxation at the highest rate. Any losses in the initial years may bring down his overall taxable income. However, once the business starts showing profits, it will add to his income.

The same provisions will apply if Maria takes funds from her in-laws. So taking a loan from her husband might be a better option. If this is done, then any profit from the business will be considered as Maria’s income. However, they must ensure that the loan is taken at a reasonable rate to be considered a genuine loan. Otherwise the tax authorities may negate the loan transaction and still club the income from the business with her husband’s income.

Maria has the option of seeking a loan from a bank or lenders. But they may need a margin or security in some form. A loan from Mahesh will be a good option for her. This way, any interest that she pays to her husband will be considered business expenditure and can be deducted from the income she earns from the business. A loan from her husband will give her the essential flexibility on payment of interest and repayment of loan in the initial period until her business stabilises.

[“source=economictimes.indiatimes”]

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Loknath Das

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