Why Should Parents-in-Law Pay Income Tax on Gifts Given to a Daughter-in-Law?

In most Indian households, financial decisions are driven by family needs rather than tax planning. One such decision is when parents-in-law gift money or property to their daughter-in-law. The intention is to welcome her into the family and give her financial security.

What many families do not realise is that this genuine and well-meaning act can quietly create a long-term tax obligation for the parents-in-law, even though they no longer own the gift or receive any income from it. This often comes as a surprise, sometimes years later, when a tax notice arrives.

At the heart of this issue lies an old provision of the Income-tax Act that deserves closer examination.

What the current law says

Under the existing Income-tax Act, 1961, the relevant provision is Section 64(1)(vi), which states:

“In computing the total income of any individual, there shall be included all such income as arises directly or indirectly— (vi) to the son’s wife, of such individual, from assets transferred directly or indirectly on or after the 1st day of June, 1973, to the son’s wife by such individual otherwise than for adequate consideration.”

In simple terms, this means that if parents-in-law gift an asset to their daughter-in-law without receiving something of equal value in return, any income earned from that asset must be added to the income of the parents-in-law for tax purposes.

This applies to all kinds of assets. It could be rental income from property, interest from bank deposits, dividends from shares, or income from a business started using the gifted funds.

The same rule in the new tax law

India is set to move to a new Income-tax Act from 1 April 2026. Many people expected that outdated provisions would be reviewed during this transition. This particular rule has been retained almost word for word.

The new provision is Section 99(1)(b) of the Income-tax Act, 2025. It reads:

“The total income of any individual, for a tax year, shall include— (b) the income arising directly or indirectly to the son’s wife of such individual from assets transferred directly or indirectly on or after the 1st day of June, 1973, to her by such individual otherwise than for adequate consideration.”

In substance, nothing has changed. Even under the new law, income from assets gifted to a daughter-in-law will continue to be taxed in the hands of the parents-in-law.

Judicial Approach to Clubbing Provisions

Although the statutory language appears strict, courts have consistently attempted to apply clubbing provisions in a reasoned and balanced manner.

The Supreme Court, in CIT v. Prem Bhai Parekh (1970), laid down a critical interpretative principle. It held that income can be clubbed only where there is a real and proximate connection between the transferred asset and the income. A merely indirect or remote link is not sufficient.

This principle underscores that clubbing provisions are not intended to operate mechanically. Courts examine the true source of income, rather than applying the rule solely based on the fact of a prior transfer.

Application of Judicial Principles in Business and Partnership Cases

The judicial approach is particularly visible in cases involving business income.

In CIT v. Kanji Bhai Tivraj Bhai (Madhya Pradesh High Court), a father-in-law gifted funds to his daughter-in-law, who later became a partner in a firm. The tax authorities sought to club her share of profits with the father-in-law’s income.

The court rejected this attempt, holding that the income arose primarily because of her status as a partner in a commercial venture, not merely due to the initial gift. The gift was not the proximate cause of the income.

The Supreme Court in CIT v. Prahladrai Agarwala (1989) reaffirmed that business profits earned by a family member cannot automatically be traced back to the original transfer unless the facts clearly establish such a connection.

These decisions demonstrate that courts have consciously limited the reach of the clubbing provisions where commercial reality does not justify their application.

Limited Judicial Relief in Passive Income Situations

The position is far less favourable in cases involving passive income, such as rental income from property or interest on deposits.

Where a property gifted to a daughter-in-law generates rent, the link between the asset and income is direct and immediate. In such cases, courts have limited scope to grant relief, and the income continues to be clubbed with the parents-in-law’s income year after year.

It is in these common, everyday situations that the provision causes the greatest hardship, particularly for retired parents-in-law.

Practical Impact on Taxpayers

Most families assume that once a gift is completed and ownership is transferred, their tax exposure ends. Since the gift itself is tax-exempt, there is no immediate indication of a future tax consequence.

The issue typically arises much later, when income from the gifted asset is picked up during assessment proceedings. By that time, parents-in-law may be senior citizens with limited income and limited involvement in the management of the asset.

Importantly, the clubbing is not restricted to a single year. It applies on a continuing basis, so long as income can be traced to the gifted asset.

Disconnect Between Ownership and Tax Incidence

Once a gift is made, parents-in-law cease to have any legal or beneficial interest in the asset. They cannot control it or decide how the income is used. The daughter-in-law becomes the absolute owner.

Despite this, the tax liability continues to be imposed on the parents-in-law. This creates a disconnect between ownership and taxation, a concept that courts otherwise recognise and uphold in most areas of tax law.

Relevance of the Provision in the Present Context

Clubbing provisions are intended as anti-avoidance measures, not as instruments of hardship. However, in present-day circumstances, the rule can produce outcomes contrary to its original purpose.

In situations where the daughter-in-law has a higher income and the parents-in-law fall in a lower tax bracket, clubbing can even reduce the overall tax burden. This highlights the declining relevance of the provision in its current form.

Conclusion

Courts have attempted to mitigate the rigidity of Section 64 by insisting on a real connection between the gift and the income. A modern tax framework should align taxation with ownership and enjoyment of income, rather than historical transfers.

Parents-in-law who have genuinely divested themselves of assets should not continue to bear the tax burden on income they do not receive. It is time to rethink this rule in light of contemporary social and economic realities.

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