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September 16, 2020

Thinking to gift your spouse? Income generated from such gifts will be taxed in your hands

by CA Shivam Jaiswal in Income Tax

Thinking to gift your spouse? Income generated from such gifts will be taxed in your hands

Gifts are something that are given voluntarily without expecting payment in return, to show favour towards someone, honour an occasion, or make a gesture of assistance. In India, one of the most common modes of transfer of property and money is by way of a gift. A gift can be a transfer of movable or immovable property or transfer of money from the giver to the recipient. Gifting is often used to transfer property or money within the family or to relatives by way of will or inheritance. However, gift has also been used as a medium to evade taxes.

The Indian legislative system sought to levy tax on gifts in the hands of the donor by enacting the Gift Tax Act, 1958. This legislation was abolished in 1998.Six years later, the Finance Act 2004 introduced section 56(2)(v) for taxing gifts in the hands of the recipient. Accordingly, today gifts received by an individual or Hindu Undivided Family (HUF) are taxed under the Income Tax Act.

Are Gifts exempt from tax?

  • Gifts up to Rs 50,000 in a financial year are exempt from tax.
  • However, if one receives gifts higher than this amount, the entire gift becomes taxable.
  • For instance, if you receive Rs 75,000 as a gift from your friend, the entire amount of Rs 75,000 would be added to your income and taxed at your slab rate. It would be considered ‘Income from Other Sources.’ Here, the total value of all gifts received is counted.
  • For instance, if you receive Rs 40,000 from one friend as a gift and Rs 15,000 from another friend, the limit of Rs 50,000 would be considered to be breached. The entire gift value (Rs 55,000) would be taxable in your hands.
  • Where an immovable property is received without consideration and the stamp duty value of the property exceeds Rs. 50,000, then the stamp duty value of such property will be chargeable to tax.
  • Where an immovable property is received for a consideration which is less than the stamp duty value, the difference between stamp duty value and consideration is chargeable to tax if such difference is more than the following two limits:
    • Rs. 50,000; and
    • 10% of the consideration
  • Gifts from specified relatives are exempted, regardless of amount.
  • Gifts given in contemplation of marriage of the recipient.
  • Gifts given in contemplation of the death of the donor and gifts given under a will or inheritance.

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Gifts from Relatives

  • Gifts from specified relatives are exempted, regardless of amount.
  • For this purpose, Relatives means
    • Spouse of Individual
    • Brother & Sister of Individual
    • Brother & Sister of Spouse of Individual
    • Brother & Sister of either of the parents of Individual
    • Any Lineal ascendants or descendants of the individual
    • Any Lineal ascendants or descendants of the spouse of the individual.

Basically if you gift you spouse any gift, the same will be exempt under Income Tax Provisions, no matter what the amount of the gift is.

Clubbing of income w.r.t gifts given to relatives

  • Clubbing of income basically means adding or including the income of another person (mostly family members) to one’s own income. 
  • As per section 64(1)(iv), if an individual transfers (directly or indirectly) his/her asset (other than house property) to his or her spouse otherwise than for adequate consideration, then income from such asset will be clubbed with the income of the individual (i.e., transferor).
  • Income from transfer of house property without adequate consideration will also attract clubbing provisions, however, in such a case clubbing will be done as per section 27 (pertaining to deemed ownership)​and not under section 64(1)(iv).
  • Even though the gift from a relative itself is exempt in the hands of the recipient, the income generated from the gift may be taxable under the clubbing of income provisions of the Income Tax Act.
  • For example, if Mr A gifts Rs 20 lakh to his wife, the same would not be added to the income of his wife. However, if his wife creates an FD from the same and earns interest, the interest would be added to the income of the husband.

Let us refer to the examples below to understand these clubbing provisions:-

Mr A holds 400 debentures of QWE Ltd. He gifted these debentures to his wife. Will the income from debentures be clubbed with the income of Mr A?

In this situation, the debentures are transferred to spouse. Transfer is via gift (without any consideration) and, hence, income generated from the transferred asset, i.e., interest on such debentures will be clubbed with the income of Mr A

Mr B gifted Rs. 4,00,000 to his wife. The said amount was invested by his wife in debenture of a company. Will the income from the debenture purchased by Mrs. B from gifted money be clubbed with the income of Mr B?

Rs. 4,00,000 is transferred to the spouse. Fund is transferred via gift (without adequate consideration) and, hence, the provisions of section 64(1)(iv) will be attracted. The provisions of clubbing will apply even if the form of asset is changed by the transferee-spouse.

In this case asset transferred is money and, subsequently, the form of asset is changed to debentures, hence, income from debentures acquired from money gifted by her husband will be clubbed with the income of her husband. Thus, interest on debenture received by Mrs. B will be clubbed with the income of Mr. B

The clubbing provisions of section 64(1)(iv) are not applicable in the following situations:

  • If the transfer of asset is for adequate consideration
  • If the transfer of asset is in connection with an agreement to live apart
  • If the asset is transferred before marriage, no income will be clubbed even after marriage, since the relation of husband and wife should exist both at the time of transfer of asset and at the time of accrual of income;

Gifting has always been seen as a way for people to express love and affection. With the increased focus on taxation, it becomes imperative to know its taxability, how to disclose it correctly, and maintain documents (gift deeds, property registration etc.) diligently.

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