While transferring funds to a spouse may seem advantageous for tax savings, income tax law prevents such strategies through clubbing provisions. According to reports from Mint, under Section 64 of the Income-tax Act, clubbing provisions are designed to prevent taxpayers from reducing their tax liability by transferring assets or income to certain family members. The rules apply specifically when income from assets like fixed deposits, gold, mutual funds, or stocks is transferred to a spouse and subsequently invested. Many people transfer money to their spouse for savings or investments without realising it could have tax consequences, as the income generated from those funds may still be taxed in the hands of the person who transferred the money.
As reported by Mint, if your spouse receives salary, commission, fees, or any other form of remuneration from a concern in which you have substantial interest, that income will be clubbed with the income of the spouse whose total income is higher before clubbing. According to Section 64(1)(ii), the income is generally clubbed with the income of the spouse whose total income is higher before clubbing. However, there's an important exception - the clubbing provisions will not apply if your spouse possesses necessary technical or professional qualifications and such income is solely attributable to their own technical or professional knowledge and experience.
According to tax expert Mihir Tanna, income earned from assets acquired through spouse gifts will be taxed in the hands of the spouse who received the gift. However, the gift itself is not considered taxable income for either party. This clarifies that while the income from the gifted asset remains taxable to the recipient spouse, the original gift transaction itself does not create any tax implications for either the giver or recipient. This distinction is crucial for understanding how clubbing provisions apply to gifted assets, as the clubbing provision can also apply if your spouse receives salary, commission, fees or any other remuneration from a concern in which you have a substantial stake.
Recent expert guidance confirms that transferring shares to spouse as a gift is not subject to tax. However, future income from these transferred shares will be clubbed in the hands of the husband. For short-term gains, Securities Transaction Tax (STT) is not deductible, though all expenses related to share sale or transfer are allowed as deductions including brokerage and GST. In intraday trading scenarios, all expenses related to share transfers are deductible from business income. This clarifies the specific tax treatment for share transfers between spouses, distinguishing between the gift transaction itself and subsequent income generation.
According to Mint reports, taxpayers can plan around clubbing provisions through several legal strategies. Transferring money to parents and having them invest in fixed deposits ensures the interest remains taxable in their hands, avoiding clubbing provisions. Marriage gifts are not taxable in either the giver's or recipient's hands, though any subsequent investments by the recipient will be taxed according to applicable income tax rules. Investing in Public Provident Fund (PPF) provides another legal workaround, as interest earned on PPF remains tax-free. If you invest in a PPF account opened in the name of your spouse or minor child, the interest continues to enjoy tax exemption, subject to the applicable investment limits. These strategies provide practical solutions for couples seeking to minimize tax implications while maintaining family financial planning objectives.
