Arjun Mehta, a 42-year-old salaried professional from Mumbai, gifted a residential property to his wife, Kavya Mehta, aged 39, without any monetary consideration. Although Kavya became the legal owner and later sold the property at a profit, the long-term capital gains (LTCG) were not taxed in her hands.
Under Section 64(1)(iv) of the Income-tax Act, income arising from assets transferred without adequate consideration to a spouse is clubbed with the transferor’s income. Therefore, despite Kavya executing the sale, the LTCG was taxed in Arjun’s hands.
To avoid disputes, Arjun maintained a properly executed gift deed and clear documentation. However, a minor mismatch in dates between the gift deed and property registration led to an initial query from the tax officer before the claim was accepted.
Here’s a look at how income from property gifted between spouses is taxed under clubbing provisions, and why clear documentation and compliance are key to avoiding disputes and ensuring the correct person reports the income.
Clubbing rules: Ownership vs tax liability
Section 64(1)(iv) is essentially an anti-avoidance ‘clubbing’ provision. “Where an individual transfers an asset to their spouse without adequate consideration (for example, by way of a gift), any income arising from that asset, including rent and long-term capital gains (LTCG) on sale, is deemed to be the income of the spouse transferring the property and taxed in that spouse’s hands, so long as the marriage subsists and the asset can be traced to that transfer,” says Rahul Charkha, Partner, Economic Laws Practice, a law firm.
Legally, the spouse receiving the property may become the registered owner through a gift or settlement. Still, for income tax purposes, the LTCG continues to be treated as accruing to the original owner under the deeming fiction in Section 64(1)(iv). “Thus, despite the sale deed being executed by the spouse receiving the property, the resulting LTCG is accessible in the transferor’s hands by virtue of clubbing,” says Charkha.
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Proper planning helps avoid tax issues
However, structuring plays a key role. “For instance, if funds are extended to a spouse as an interest-free unsecured loan and the spouse independently acquires the property, clubbing provisions may not apply, thereby shifting taxation legitimately,” says Aarjav Jain, Executive Director and NRI Tax Expert, Dinesh Aarjav and Associates, Chartered Accountants.
Since the gains are taxable solely in the hands of the donor spouse under the clubbing provisions, only the donor spouse should report the income on their return. This ensures there is no question of double taxation between spouses.
“However, to avoid any scrutiny in the hands of the seller, maintaining a validly executed gift deed or a signed gift acknowledgement letter at the time of transfer would become essential. Wherever possible, the property can be formally registered in the recipient’s name with the consideration clearly recorded as a gift,” says Zeel Jambuwala, co-founder and Partner, Aurtus, a full-service tax firm.
When immovable property is transferred within a family, tax disputes often arise if tax authorities question ownership, the source of funds, or the applicability of clubbing provisions. The gift deed or family settlement deed should clearly mention the relationship between parties, confirm whether the transfer is without consideration, and provide complete details of the property.
“This document eventually becomes the primary reference for tax authorities when examining whether clubbing provisions apply. Taxpayers should also preserve documents relating to the original purchase and cost of the property, including sale agreements, conveyance deeds, stamp duty receipts, and records of improvements or renovations,” says Charkha.
In addition, maintaining a clear banking trail depicting who funded the purchase, paid EMIs, or financed improvements to the property is crucial.
“Estate planning today is no longer limited to HNIs; it is becoming an essential tool for families to manage taxes, mitigate risks, and ensure seamless inheritance,” says Jain.
Anagh Pal is a personal finance expert who writes on real estate, tax, insurance, mutual funds and other topics
