Gifting money to your spouse? Here’s when tax applies and who pays it

Many people assume that transferring money to their spouse who has little or no income and investing it in their name will help in reducing the family’s tax liability, but the income tax department sees through it.

For example, if you gift money to your wife and she invests it in fixed deposits, mutual funds, gold, shares or other such assets, the income generated from those investments may still be taxed in your hands under the clubbing provisions.

However, there is an important detail here. Money gifted by one spouse to the other is exempt from tax under the Income-tax Act. The clubbing provisions come into play only when the gifted money is invested and starts generating income, such as interest, dividends or capital gains.

When are gifts exempt from taxes?

Most gifts are considered as income and must be disclosed under the head ‘Income from Other Sources’ in the income tax return (ITR) by the recipient. Whether, it’s cash, high-value items or other assets, they are subject to taxation at the taxpayer’s applicable slab rates.

However, the income tax law also provides several exceptions, under which certain gifts are exempt from taxes. The following are some of the key exemptions available under Section 56 of the income tax act for gifts that are not taxed:

• Gifts received from relatives (which includes spouse)
• Gifts received from non-relative up to ₹50,000 a year.
• Gifts by the way of inheritance or will.
• Gifts received on the occasion of marriage (wedding gifts).

How do clubbing provisions work?

Under Section 64 of the Income-tax Act, the clubbing provisions aim to prevent taxpayers from unfairly reducing their tax outgo by transferring assets or income to specified family members and investing it in their name simply because they fall in a lower tax bracket.

In simple terms, clubbing of income means that income earned by another person may be added to your taxable income in certain situations specified under the law. However, income of any and every person cannot be clubbed on a random basis while computing total income of an individual and also not all income of a specified person can be clubbed.

If your spouse receives salary, commission, fees or any other form of remuneration from a concern in which you have a substantial interest, that income will be clubbed with the income of the spouse whose total income is higher (before clubbing), in accordance with Section 64(1)(ii).

When clubbing provisions don’t apply?

One notable exception is where the spouse earns income through their own professional or technical expertise. In such cases, if the income is solely attributable to the spouse’s qualifications, knowledge and experience, the clubbing provisions do not apply, according to a Cleartax report.

Another case where the clubbing provisions are not applicable is when you invest in the Public Provident Fund (PPF) on behalf of your spouse because interest earned on PPF is exempt from taxes. Since there is an investment cap of ₹1.5 lakh per individual in PPF , You can open multiple PPF accounts in the name of your spouse or minor child to get this benefit.