The income tax department has clarified that when a property is transferred to a spouse as a gift, the original owner's holding period is also counted to determine whether the asset qualifies as a long-term capital asset. According to reports from The Economic Times, for land and building, the holding period for a capital asset to qualify as a long-term capital asset is 24 months. For capital assets received as a gift or under inheritance, the period for which the same was held by the original owner who had actually paid for it is also included in the holding period of the seller. However, under Section 64 of the Income Tax Act, income from assets gifted to a spouse gets clubbed back to the original owner, meaning any dividends or capital gains earned by the spouse remain taxed at the original owner's slab rate. This contrasts sharply with gifts to parents, where Section 56(2)(x) provides tax-free transfer of shares to specified relatives, with the recipient paying tax on subsequent income rather than the original giver.
Since the combined holding period of the original owner and spouse exceeds 24 months, the flat becomes a long-term capital asset and the profits on sale of this flat shall be treated as long-term capital gains. As reported by The Economic Times, for computation of such long-term capital gains, the amount paid by the original owner shall be treated as the spouse's cost. Since the flat was acquired by the original owner in 2000, the fair market value of the flat on 1st April, 2001 can be taken as the spouse's cost. This calculation method ensures that the original investment is properly accounted for when determining the taxable gains.
Presuming that the flat was transferred as a gift, the clubbing provisions will come into play, and the long-term capital gains made by the spouse on sale of the flat shall be included in the original owner's income. According to The Economic Times, the original owner will have to pay the tax on the gains made by the spouse. The original owner has the option to either pay tax at 12.50% on the profits made or at 20% on indexed long-term capital gains since the flat was acquired before 23rd July 2024. Under Section 64 of the Income Tax Act, this clubbing rule makes gifting to a spouse pointless for tax savings, as the income from the gifted asset remains taxed at the original owner's slab rate. This contrasts with gifts to parents, where clubbing rules do not apply, allowing the recipient to pay tax at their own slab rate.
Recent tax expert guidance illustrates the practical application of these rules in real-world scenarios. As reported by Tax2win, when a wife gifts jewellery sale proceeds to her husband without consideration, income earned from investments made using the gifted amount will generally be clubbed with her income under Section 64 provisions. However, income from the husband's own money and investments will continue to be taxed in his hands. This means that if the husband's total income exceeds ₹12 lakh only due to rental income and income from his own investments, that portion remains taxable in his hands. But income arising from investments made using the gifted amount will be taxable in the wife's hands. Maintaining proper records showing the source of funds used for each investment is crucial to avoid disputes and ensure correct tax liability reporting.
