Moment guide · FY 2026-27
I want to pay salary to my spouse or family member in my business
Can I pay my spouse or a family member a salary from my business to split family income and save tax?
Yes, but only if the salary is genuinely for services actually rendered and is within the arm's length limit under section 40A(2). If the spouse has professional or technical qualifications and genuinely performs the role, the salary is taxed in their hands — not clubbed under section 64(1)(i) — and the business can deduct it, with TDS under section 192 reflected in Form 26AS.
Your legitimate options
Every route the statute actually gives you — with its condition, cap and deadline.
| Route | Condition | Cap / deadline |
|---|---|---|
| Employment contract route | Spouse/family member genuinely works, holds professional or technical qualifications, and the salary is at market rate | Market benchmark; arm's length limit u/s 40A(2) |
| Reimbursement-only route | Family member incurs genuine business expenses personally and is reimbursed at actuals | Actual expense backed by bills; no remuneration element |
| No salary route / income-shifting attempt | No real services are rendered or the payment is inflated | Full disallowance u/s 40A(2) and clubbing u/s 64(1)(i) |
| Formal TDS route | Salary is paid to any employee, including a relative | TDS u/s 192, matching Form 26AS; failure invites 40(a)(ia) disallowance |
The #1 trap
Paying 'salary' without real services or above the market rate does not just get disallowed — the entire amount can be clubbed back in your hands under section 64(1)(i), defeating the whole family-income plan.
The decision path
Follow it top to bottom — the first condition that matches is your answer.
Worked example
Rohit, founder of a family-held design consultancy (Pvt Ltd)
Rohit owns 90% of a Delhi design consultancy and wants his wife Neha, who has an MBA in finance, to handle the accounts and compliance function at a salary of ₹12 lakh a year. Earlier the company paid Neha only ₹4 lakh as a token annual amount — precisely the kind of arrangement IT could call a colourable device. Rohit now creates a board resolution appointing Neha as Finance Head, signs a formal employment contract listing her duties, and benchmarks the pay against market data: a comparable finance professional in Delhi earns ₹14–16 lakh, so ₹12 lakh is defensible under the arm's length test in section 40A(2). The company deducts TDS under section 192 on every salary credit, so Neha's Form 26AS shows the salary and her ITR matches it. Because Neha has a professional qualification and the remuneration is attributable to her qualifications and actual work, the section 64(1)(i) clubbing exception applies — the salary is taxed in her hands, not Rohit's. For FY 2026-27, Neha declares the ₹12 lakh salary; after the standard deduction of ₹75,000 her taxable income is ₹11.25 lakh, which is within the ₹12 lakh rebate limit under the new regime, so her tax liability becomes nil. The company saves corporate tax of roughly 27.82% (25% base rate with 7% surcharge and 4% cess) on the deductible salary — about ₹3.34 lakh a year. Rohit had considered paying Neha ₹24 lakh to shift more family income, but the market benchmark is ₹14–16 lakh, so the excess would be disallowed under section 40A(2) and clubbed back in his hands with interest. He also documents Neha's deliverables — bank signing authority, monthly reconciliation reports, vendor payment schedules — to defeat any 'no real service' allegation during scrutiny. A quick call with us dials in the final figure.
Questions people actually ask
Sections: 40A(2), 64(1)(i), 192, 87A · Last verified 2026-08-11 · Reviewed by Harun Raaj & Associates, Chartered Accountants. Every figure cites the Income-tax Act, 1961 (with ITA 2025 mapping via our section index).