#spouse property

Legally, the spouse who gets the gift may become the owner of the property. However, for tax reasons, LTCG is still considered income for the original owner.

Arjun Mehta, a 42-year-old salaried worker from Mumbai, gave his wife Kavya Mehta, 39, a house without asking for money. Kavya became the legal owner and later sold the property for a profit, but the long-term capital gains (LTCG) were not taxed on her.

According to Section 64(1)(iv) of the revenue-tax Act, revenue from assets given to a spouse without enough payment is added to the income of the person who gave them. So, even though Kavya sold the property, the LTCG was taxed in Arjun's name.

Arjun kept a fully signed gift deed and clear records to avoid problems. The tax officer asked a question at first because the dates on the gift deed and property registration were a little different.

This is how income from property given to one spouse by another is taxed under clubbing rules. It also explains why precise paperwork and following the rules are important to avoid arguments and make sure the right person reports the income.

Rules for clubbing: who owns what and who pays taxes

In essence, Section 64(1)(iv) is a "clubbing" rule that stops people from avoiding taxes. Rahul Charkha, a partner at the law firm Economic Laws Practice, says, "If a person gives an asset to their spouse without getting anything in return (like a gift), any income from that asset, including rent and long-term capital gains (LTCG) on sale, is considered to be the income of the spouse who transferred the property and is taxed in that spouse's hands, as long as the marriage lasts and the asset can be traced back to that transfer."

The spouse who gets the property can legally become the registered owner through a gift or settlement. However, for tax purposes, the LTCG is still considered to belong to the original owner because of the deeming fiction in Section 64(1)(iv). Charkha explains, "So, even though the spouse who got the property signed the sale deed, the LTCG is still available to the transferor because of clubbing."

Planning ahead helps you stay out of trouble with taxes

But structuring is very important. Aarjav Jain, Executive Director and NRI Tax Expert at Dinesh Aarjav and Associates, Chartered Accountants, says, "For example, if money is given to a spouse as an interest-free, unsecured loan and the spouse buys the property on their own, clubbing provisions may not apply, which means that taxes can be shifted legally."

The clubbing rules say that the gains are exclusively taxable for the donor spouse, thus only the donor spouse should disclose the income on their tax return. This makes sure that spouses don't have to pay taxes twice.

"To avoid any problems for the seller, it would be important to keep a validly executed gift deed or a signed gift acknowledgment letter at the time of transfer." "Wherever possible, the property can be formally registered in the recipient's name with the consideration clearly recorded as a gift," explains Zeel Jambuwala, co-founder and partner at Aurtus, a full-service tax business.

If tax authorities question who owns the property, where the money came from, or whether clubbing provisions apply, tax conflicts commonly happen when family members move property around. The gift deed or family settlement deed should explicitly state the relationship between the parties, indicate whether the transfer is without payment, and give full information about the property.

"This document finally becomes the main source of information for tax authorities when they look into whether clubbing provisions apply. Charkha states that taxpayers should also keep evidence of the initial purchase and cost of the property, such as sale agreements, conveyance deeds, stamp duty receipts, and records of additions or repairs.