Tax on Gifts to Spouse: Clubbing Provisions & Planning

Tax implications of Gifts to Spouse

Gifts made to a spouse are not taxable in the hands of the recipient because Section 56(2)(x) of the Income Tax Act, 1961 specifically exempts gifts received from a “relative,” and the definition of relative includes spouse. Therefore, no tax liability arises in the hands of the spouse on receipt of such gifts, whether in the form of cash, movable property, or immovable property. It is to be noted that the term “relative” is not specifically defined under clause (x) of Section 56(2) of the Income Tax Act, but has been borrowed from the Explanation to clause (vii). The definition provided under clause (vii) of Section 56(2) is as follows:

“relative” means, —

(i) in case of an individual— (A) spouse of the individual;(B) brother or sister of the individual;(C) brother or sister of the spouse of the individual;(D) brother or sister of either of the parents of the individual;(E) any lineal ascendant or descendant of the individual;(F) any lineal ascendant or descendant of the spouse of the individual;(G) spouse of the person referred to in items (B) to (F); and

(ii) in case of a Hindu undivided family, any member thereof;

Clubbing Provisions – Section 64(1)(iv)

 Though gifts to a spouse are not taxable as income because of the exemption under Section 56(2)(x), the income generated from such gifted assets is subject to the clubbing provisions of Section 64(1)(iv). In simple terms, the gift itself remains tax-free in the hands of the recipient spouse, but any income earned from that gift is not treated as independent income of the recipient. Instead, it is clubbed with the income of the transferor spouse and taxed accordingly.

For example, if a husband gifts ₹10 lakh to his wife, she is not liable to pay tax on the amount received. However, if she invests it in a fixed deposit and earns ₹1 lakh as interest, that interest will be included in the husband’s income and taxed in his hands. Similarly, if the wife invests the gifted amount in shares and earns dividend or capital gains, such income will also be taxable in the husband’s hands. Thus, the law ensures that while the transfer of the gift itself is tax-neutral, the subsequent income from it remains within the tax ambit of the transferor.

 Planning Angle

Gifting to a spouse does not reduce overall tax liability because of the clubbing provisions, which ensure that income arising from the gifted asset is taxed in the hands of the transferor spouse. However, there are legitimate ways to avoid the impact of clubbing.

1. Second-Generation Income

 Clubbing provisions under Section 64(1)(iv) apply only to the income directly arising from the gifted asset and not to further income generated from such income. For instance, if a husband gifts money to his wife and she invests it in a fixed deposit, the interest earned will be clubbed with the husband’s income.

However, if that interest is further reinvested and earns additional income, such “second-generation income” will be taxable in the wife’s hands. Similarly, if the wife uses the gifted money to start a business, the profits will generally be clubbed with the husband’s income unless it can be shown that her own skill, effort, or independent resources are substantially contributing to the business. These provisions apply in cases of transfer of assets, whether movable or immovable, where the transfer is made without adequate consideration, and the scope also covers both direct and indirect transfers.

 2. Use of Exempt Income Sources

One effective way to mitigate the impact of clubbing provisions is by using exempt income sources for investment of the gifted amount. If the money gifted to a spouse is invested in tax-free instruments, the income generated remains exempt irrespective of clubbing. Examples include investments in PPF (Public Provident Fund) where the interest is fully exempt, tax-free bonds where the interest is not chargeable to tax, and ULIP maturity proceeds that qualify for exemption under Section 10(10D), subject to prescribed conditions. In such cases, even though the clubbing provisions technically apply, the tax impact is neutral because the income itself enjoys exemption under the law.

3. Joint Investments

Another strategy for tax efficiency is to make joint investments with a spouse, especially in immovable property. For example, a house property can be purchased jointly by contributing partly from the gifted money and partly from the spouse’s own funds. In such cases, the rental income from the property is apportioned between the spouses according to their ownership ratio. However, under the clubbing provisions, only the portion of income attributable to the share funded by the gifted money will be clubbed with the transferor spouse’s income, while the spouse’s independent share (arising from her own contribution) will be taxed in her hands separately. This allows partial tax separation and efficient planning when both spouses contribute genuine funds toward the joint investment.

4. Gifts to Major Children or Parents

 Clubbing provisions apply only in cases of gifts made to a spouse or a minor child, and not to major children or parents. Therefore, gifting assets or money to a major child or a dependent parent can be an effective tax planning strategy. The recipient can then invest the gifted funds, and the income generated will be taxed in their own hands, without any clubbing back to the transferor. This approach not only avoids the clubbing provisions but also enables income-splitting across family members, thereby reducing the overall tax burden of the family unit.

5. Business Participation

Another planning route is through business participation by the spouse. If the gifted funds are introduced into a business in which the spouse is actively involved, the tax treatment is different. In such cases, only the passive return on the capital—such as interest on capital or remuneration that is purely linked to the gifted asset—may be subject to clubbing. However, the profits attributable to the spouse’s own skill, effort, or managerial contribution are considered independent income and are taxable in the spouse’s hands. This distinction ensures that genuine participation and contribution by the spouse in a business is recognized for tax purposes, thereby allowing a fair separation of incomes.

6. Use for Household Expenditure

Gifting money to a spouse for household expenditure or personal use is another simple and effective way to avoid clubbing issues. When the gifted amount is spent on routine expenses, jewellery, travel, or other personal needs, no income is generated from the asset, and therefore, there is nothing to be clubbed back in the hands of the transferor spouse. This approach enables smooth transfer of wealth within the family without triggering additional tax consequences, as the clubbing provisions apply only where income actually arises from the gifted asset.

 7. Future Tax Planning

Another strategic consideration is future tax planning based on the spouse’s expected income. If the spouse is currently in a lower tax bracket—for example, not earning at present but planning to start a job or business later—building up her independent funds through second-generation income can be advantageous. By allowing the initial income from gifted assets to be reinvested, the subsequent earnings will be taxable in the spouse’s hands, potentially at a lower rate than the transferor. This approach helps in optimizing the overall family tax burden over time, while still complying with the clubbing provisions.

Gift to Spouse – Taxability & Clubbing Illustration

Summary: Gifts made to a spouse are not taxable in the hands of the recipient under Section 56(2)(x) of the Income Tax Act, 1961, as a spouse is considered a “relative.” This exemption applies to cash, movable property, and immovable property. However, under Section 64(1)(iv), any income generated from the gifted asset—such as interest from a fixed deposit, dividend from shares, or capital gains—is clubbed with the income of the transferor spouse and taxed accordingly. Clubbing applies only to first-generation income; any subsequent income earned from reinvestment, called second-generation income, is taxable in the hands of the recipient spouse. Tax planning strategies include investing in tax-free instruments like PPF or tax-free bonds, making joint investments where only the portion funded by gifted money is clubbed, gifting to major children or parents to enable income splitting, using gifted money in a business where active participation allows profits to be taxed in the spouse’s hands, and spending on household or personal expenses, which generates no income and therefore avoids clubbing. Additionally, building up the spouse’s independent funds through reinvestment can help reduce the overall family tax burden, especially if the spouse is expected to fall into a lower tax bracket in the future.

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Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the author whatsoever and the content is to be used strictly for informational and educational purposes. While due care has been taken in preparing this article, certain mistakes and omissions may creep in. the author does not accept any liability for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.