What is Clubbing of Income?

Clubbing of Income means adding someone else’s income to your own and paying tax on it. This usually happens when you give money or assets to a family member, but the income is still taxed in your hands. This added income is termed “deemed income”. This is applicable only to individuals and not to Hindu Undivided Family (HUFs) or companies.

Section 60 to 64 of the Income Tax Act,1961,explains when and how clubbing applies. It helps prevent tax saving by shifting income to family members.Clubbing can apply to income from things like property,fixed deposits,shares ,mutual funds or post office savings.

Clubbing of Income of Spouse [Section 64(1)(ii), (iv), (vii)]

One common way people try to reduce their tax is by transferring money or assets to their spouse. But the Income Tax Act has clear rules to prevent this, and in many cases, the income is still taxed in the hands of the person who made the transfer.

Here’s how these rules work:

Salary from a business or job: If your spouse works in a business or company where you have a major stake, and they got the job mainly because of your influence, not because of their own qualifications, then their salary can be added to your income for tax purposes. But if your spouse is qualified and genuinely working, their salary will be taxed in their own name.

Both spouses earning from the same source: If both you and your spouse are earning from the same business or concern and both have a significant stake, the income will be taxed in the hands of the spouse who has the higher income, not counting this shared income. However, if both are working independently based on their own skills, the clubbing rule does not apply.

Gift of assets: If you gift money or a property to your spouse without any payment or for a very small amount, any income earned from that asset, like rent or interest, will be added to your income and taxed accordingly.

Reinvested gifts: Even if your spouse reinvests the gifted money in something else, like a fixed deposit or shares, the income from those investments is still considered yours for tax purposes.

Indirect transfers: If you transfer an asset to someone else, like a friend or a trust, but your spouse benefits from it, even indirectly, then the income can still be taxed in your hands.

Gifts received from relatives are completely tax-free, no matter how much you receive. There is no upper limit when it comes to gifts from family, as defined under the Income Tax Act.But if you get a gift from someone who is not a relative and its total value is more than ₹50,000 in a financial year, then the entire amount becomes taxable.

Gifts received from relatives are not taxed under the Income Tax Act. The law clearly defines who qualifies as a relative for this purpose. Here's who is considered a relative:

• Your spouse
  
  
• Your brother or sister
  
  
• Your spouse’s brother or sister
  
  
• Your parents’ brother or sister
  
  
• Your parents, grandparents, children, or grandchildren
  
  
• The parents, grandparents, children, or grandchildren of your spouse
  
  
• The spouses of all the above relatives
• Step Siblings [ as per section 56(2)(vii)]

However, if you receive a gift from a non-relative and the total value exceeds ₹50,000 in a financial year, the entire amount becomes taxable under “Income from Other Sources” as per Section 56(2)(x). This section was introduced by the Finance Act, 2017, and applies to both individuals and HUFs.

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In the case of property received as a gift from a relative,like a husband gifting property to his wife,there is no tax at the time of gift. But if the property is later sold, capital gains tax applies, and due to clubbing provisions, the gain may be taxed in the hands of the person who originally gifted it.

Under the Income Tax Act, 1961, gifts received from relatives are not taxed. But if the person who received the gift later sells or transfers it, then tax comes into play. If the gift was a capital asset like property or shares, any profit made on selling it will be taxed as capital gains.

Put simply, if you inherit or receive a capital asset as a gift and then sell it, you’ll have to pay tax on the profit. Depending on how long you held the asset, this could be short-term or long-term capital gains tax.

Calculation of Capital Gain

For short-term capital gains, the profit is calculated as:

Selling Price – Expenses related to the sale – Purchase Price – Cost of any improvements

For long-term capital gains, the calculation is mostly the same, but you also have the option to adjust the cost using indexation. Indexation helps you factor in inflation and reduce your taxable profit.

So, with indexation, the formula becomes:

Selling Price – Expenses related to the sale – Indexed Purchase Price – Indexed Cost of Improvement

Keep in mind that using indexation means you’ll be taxed at a slightly higher rate, but your taxable gain might be lower after adjusting for inflation.

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Cost of Acquisition

When you sell a gifted asset, your cost of acquisition is not zero. Instead, you inherit the original purchase price paid by the previous owner (the person who gave the gift). Any improvements made by the previous owner can also be added to the cost.

The Period of Holding

The holding period also includes the time the asset was held by the previous owner. So, even if the wife receives the property today but the husband bought it 10 years ago, it qualifies as a long-term capital asset.

Capital Gain Exemption

When you sell a capital asset for a profit, capital gain happens.Income Tax Act offers certain relief through exemptions and one of the common ones is Section 54.

Section 54 allows you to avoid paying capital gains tax if you use the profit to buy or build another residential house. This way, you can lower your tax liability, provided you meet certain conditions set by the law.

Conditions to Qualify for Section 54 Exemption

To claim tax exemption under Section 54, a few conditions must be met. First, the property being sold should be a residential house held for more than two years. It should also be taxable under the head "Income from House Property."

The exemption is available if you use the capital gains to either buy another residential house within one year before or two years after the sale, or if you construct a new house within three years from the date of sale. In cases where the property is acquired compulsorily, the time limit is counted from the date you receive the compensation.

It is important to note that the new house must be located in India. If you buy or build a house outside the country, the exemption under Section 54 will not apply.

Also, from 1 April 2023, there is a cap on the exemption you can claim under Section 54. The maximum limit has been set at ₹10 crore. Earlier, there was no upper limit on the amount of exemption.

Recent ITAT Ruling

Gift of Property Share from Husband to Wife Eligible for Capital Gain Exemption, But Clubbing and Capital Gains Rules Apply: Rules ITAT

Kavita Manoj Damani vs ITO INT Tax Ward CITATION : 2025 TAXSCAN (ITAT) 1049

The Mumbai ITAT ruled that a wife can claim capital gains exemption under Section 54 of the Income Tax Act when purchasing a new property from her husband, even if the original property was gifted by him. The tribunal overruled the AO and CIT(A), who had denied the exemption, alleging tax avoidance, circular transactions, and improper use of sale proceeds. The ITAT found that the property transfer was valid, payment was made within the allowed timeline, and Section 54 conditions were met. Therefore, the exemption was allowed, though clubbing provisions and capital gains rules were held to still apply.

Conclusion

When a husband gifts a share in a property to his wife, there is no capital gains tax on the transfer, and the gift is also not taxed in the wife's hands. But that does not mean there are no tax implications. If the property earns any income or is later sold, the husband may still have to pay tax on it under the clubbing rules.

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