Clubbing of Income / Income tax on gifts

Although the Gift tax in India is abolished although certain provisions in Income Tax law makes gifts or income derived from gifts taxable. The below article explains the summary of related gift related provisions under the Income Tax Act.

SECTION

NATURE OF TRANSACTION

TO BE CLUBBED IN THE HANDS OF

CONDITIONS/EXCEPTIONS

Section 60 of Income Tax Act

Transfer of Income without transfer of Assets.

Transferor who transfers
the income.

Irrespective of:
1. Whether such transfer is revocable or not.

2. Whether the transfer is effected before or after the commencement of IT Act.

Income for the purpose of Section 64 includes losses.

Section 61 of the Income Tax Act

Revocable transfer of Assets.

Transferor who transfers
the Assets.

Transfer also held as revocable
1. If there is also a provision in the agreement to re-transfer directly or indirectly whole/part of income/asset to the transferor;

2. If there is a right to reassume power, directly or indirectly, the transfer is held revocable and actual exercise is not necessary.

3. Where no absolute right is given to transferee and asset can revert back to the transferor in prescribed circumstances, the transfer is held as revocable.

Exceptions
Trust/transfer irrevocably during the lifetime of beneficiaries/transferee

Section 64(1)(ii) of Income Tax Act

Salary, Commission,
Fees or remuneration
paid to spouse from a concern in which an individual has a
substantial* interest.

Spouse (husband/wife) whose total income (excluding income to be clubbed)
is greater.

Condition

The relationship of husband
and wife must subsist at the
time of accrual of the income

Exceptions (Clubbing not applicable if)


1. Spouse possesses technical
or professional qualification
and remuneration is solely
attributable to the application of
that knowledge/qualification.

2. Income other than salary, commission, fees or remuneration.

Section 64(1)(iv) of Income Tax Act

Income from assets
transferred directly or indirectly to the spouse without adequate consideration.

(other Than House property*)

Individual transferring
the asset.

Clubbing also applicable, if:-

1. Cash gifted to spouse and he/she invests to earn interest.

2. Capital gain on sale of property which was received without consideration from the spouse.

3. The transaction must be real.

Clubbing not applicable if:
The assets are transferred;


1. With an agreement to live apart.

2. Before marriage.

3. Income earned when relation does not exist.

4. By Karta of HUF gifting co-parceners property to his wife.

5. Property acquired out of pin (saved) money.

6. Income earned out of Income arising from transferred assets not liable for clubbed.

Section 64(1)(vi) of Income Tax Act

Income from the assets transferred to Daughter in Law (son’s wife).

Individual transferring
the Asset.

Conditions:


The transfer should be without adequate consideration. Cross transfers are also covered.

Section 64(1)(vii) of Income Tax Act

Transfer of assets by an individual to a person or AOP for the immediate or deferred benefit of his Spouse.

Individual transferring
the Asset.

Conditions:


1. The transfer should be
without adequate consideration.

2. Transferor need not necessarily have taxable income of his own

Section 64(1)(viii) of Income Tax Act

Transfer of assets by an individual to a person or AOP for the immediate or deferred benefit of his Son’s wife.

Individual transferring
the Asset.

Conditions:

1. The transfer should be
without adequate consideration.

2. Transferor need not necessarily have taxable income of his own

Section 64(1A) of the Income Tax Act

Income of a minor child
[Child/kid includes step child, adopted child, and minor married daughter].

1. If the marriage subsists, in the hands of the parent whose taxable income is higher or

2. If parents are staying separate because of divorce, in the hands of the person who maintains the minor child.

3. Income once included
in the total income of either of parents, it shall continue to be included in the hands of the same parent in the subsequent year unless AO is satisfied that it is necessary to do so

Clubbing not applicable for:


1. Income of a minor child
suffering any disability specified u/s. 80U.

2. Income on account of manual work done by the minor child.

3. Income on account of any
activity involving the application
of skills, talent or specialized knowledge and experience such as income from KBC or quiz competition.

4. Income out of property transferred for without consideration to a minor married daughter,

Exemption up to limit:-

The parent in whose hands the minor’s income is clubbed is entitled to an exemption up to Rs. 1,500 per child. [Section 10(32)]

Section 64(2) of the Income Tax Act

Income of HUF from
property converted by the individual into HUF property.

Income is included in
the hands of individual
& not in the hands of
HUF.

Clubbing applicable even if:
The converted property is
subsequently partitioned;
income derived by the spouse from such converted property will be taxable in the hands of the individual.

Section 27 of the Income Tax Act

Income from House property
transferred directly or indirectly to the spouse without adequate consideration.

Individual transferring
the asset.

Income from transfer of such house property will be the income of transferor such as Rental Income etc.

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