A 42-year-old salaried professional from Mumbai gifted a residential property to his 39-year-old wife without any payment. She became the legal owner and sold it for a profit, but the long-term capital gains (LTCG) tax applied to him, not her.
Section 64(1)(iv) of the Income-tax Act requires income from assets transferred to a spouse without adequate consideration—such as gifts—to be combined with the transferor’s income. Even though she handled the sale, the LTCG tax fell on his tax return.
He avoided issues by using a properly executed gift deed and solid records. A small date mismatch between the gift deed and registration prompted a tax officer query, but authorities accepted the claim after review.
Clubbing Rules: Ownership vs. Tax Liability
Section 64(1)(iv) serves as an anti-avoidance measure. “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,” explains Rahul Charkha, Partner at Economic Laws Practice.
The receiving spouse may register as the legal owner via gift or settlement. Yet, for tax purposes, LTCG remains with the original transferor under this provision. “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,” Charkha adds.
Smart Planning Prevents Tax Disputes
Strategic approaches matter. “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,” notes Aarjav Jain, Executive Director and NRI Tax Expert at Dinesh Aarjav and Associates.
Only the donor spouse reports the gains to prevent double taxation. “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 at Aurtus.
Family property transfers often spark disputes over ownership, funds source, or clubbing rules. Gift or family settlement deeds must detail the relationship, confirm no consideration, and list property specifics. Taxpayers should retain original purchase documents like sale agreements, conveyance deeds, stamp duty receipts, and improvement records, Charkha advises.
A clear bank trail showing who funded the buy, EMIs, or upgrades proves vital. “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,” Jain states.
