Gifts between spouses are generally considered tax-free under the Income-tax Act, 1961. However, this exemption is not absolute—and can quickly collapse if the transaction is not properly substantiated.
Under Section 56(2)(x) of the Income-tax Act, 1961, gifts received from specified relatives, including spouses, are exempt from tax. Such an exemption applies only where the transaction is genuine and properly substantiated.
It is important to note that the exemption under Section 56(2)(x) does not override the applicability of Section 68 where the genuineness of the transaction is in doubt.
In a recent case involving Shilpa Shetty Kundra, the tax authorities treated a substantial gift of ₹12.54 crore as unexplained income due to inadequate supporting evidence. [Shilpa Shetty Kundra Vs DCIT (ITAT Mumbai)]
Facts in Brief: The key facts of the case are summarised below:
The assessee received a gift of ₹12.54 crore from her husband. During the assessment proceedings, the Assessing Officer called for supporting documents to verify the nature and source of the transaction.
In response, the assessee furnished a copy of the gift deed along with the acknowledgement of her husband’s income tax return. However, she failed to provide crucial supporting evidence, such as
- Bank statements reflecting the actual transfer of funds.
- Details of the mode of payment/receipt.
- Adequate proof of the financial capacity of the donor.
Further, the donor’s disclosed income (₹27.71 lakh) was not commensurate with the magnitude of the gift.
Accordingly, the amount was treated as unexplained credit under Section 68 and taxed under Section 115BBE.
When Does a Gift Become Unexplained Income?
Under Section 68 of the Income-Tax Act 1961, any sum credited in the books of an assessee may be treated as unexplained income if the assessee fails to satisfactorily explain the Identity of the donor, the genuineness of the transaction, & Creditworthiness of the donor.
Once such an addition is made, it is taxed under Section 115BBE at a punitive rate (currently around 78% including surcharge and cess) with no deductions.
In the present case, the assessee’s claim of creditworthiness appeared weak on multiple counts, thereby raising serious doubts regarding the genuineness of the transaction
How to Substantiate a Gift from Spouse?
In tax proceedings, a relationship alone does not validate a transaction –credible evidence does. It is therefore essential to maintain the following documentation to establish the genuineness of an exempt gift.
Gift Deed & Its Contents: A properly drafted gift deed should include:
- Details of donor and donee (Name, PAN, address)
- Nature of relationship
- Amount gifted
- Mode of transfer (bank details, cheque/NEFT)
- Declaration of voluntary transfer
- Signatures of parties and witnesses
Bank Trail (Most Critical): Mere existence of funds is not enough—movement of funds must be clearly traceable. The transfer of funds must be substantiated through the following:
- Bank statements of both donor and donee
- Clear reflection of transfer
- Correlation between debit and credit entries.
Creditworthiness of the Donor: Another critical factor is the donor’s financial capacity.
Creditworthiness is not judged merely on current income, but on:
- Capital base
- Past savings
- Assets and investments
Where the Assessee’s Case Failed: The shortcomings in the assessee’s case can be clearly understood from the following: In the present case, the claim of creditworthiness appeared weak on multiple counts, raising serious doubts regarding the genuineness and authenticity of the transaction.
- Donor’s income (₹27.71 lakh) was not aligned with ₹12.54 crore gift
- No bank statements evidencing actual transfer
- The gift deed did not specify the mode of transaction
- No clear source of funds established
- Lack of correlation with financial disclosures
Tribunal’s Key Observation
The Tribunal observed that the assessee had failed to discharge the primary onus under Section 68 by furnishing complete and reliable evidence. Accordingly, the matter was remanded back to the Assessing Officer for fresh examination, with directions to provide proper documentation.
Conclusion: The above case serves as a crucial reminder that while the Income-tax Act provides exemption for gifts from specified relatives, such exemption is not unconditional.
The onus lies on the assessee to establish the identity, genuineness, and creditworthiness of the donor. Equally important is the donor’s ability to explain the source of funds—whether through accumulated savings, sale of assets, or withdrawals.
In the absence of adequate documentation, even genuine transactions between spouses may be recharacterized as unexplained income and subjected to punitive taxation.
In tax matters, it is not the relationship, but the documentation, that ultimately determines the fate of a transaction.
Note: The proposed Income-tax Bill, 2025, expected to be effective from 01.04.2026, may restructure and renumber provisions. However, the fundamental principles discussed above are expected to remain materially the same.
Disclaimer: The article is for educational purposes only.
The author can be approached at caanitabhadra@gmail.com
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