Income tax clubbing provisions usually come up as a warning. If you gift money to your spouse and they earn income on it, rules require that the income be added back to your income rather than theirs.
However, a recent judgment from a tax tribunal showed that the same rule can work the other way, and actually help you.
The case involved a Lucknow-based man who gifted about ₹1.15 crore to his wife. The wife used the money to trade in futures and options (F&O), resulting in net losses. When the husband filed his income tax return (ITR), he claimed losses on his wife’s F&O trades as his own and set them off against his income as per clubbing provisions.
The tax officer denied the claim, arguing that his wife had run the trades and taken the risk, so the loss was hers to carry. She had even reported a small trading profit of her own that year, which the officer used to argue she was an independent trader.
The Income Tax Appellate Tribunal (ITAT), Lucknow, did not agree with the tax department’s argument and held that a loss arising out of gifted money can be set off against the gifter's income (in this case, the husband's) under Section 64(1)(iv).
The spouse placing the trades made no difference. Once the gift was proved by a gift deed and an affidavit, and the department had nothing to the contrary, the loss followed the money back to the husband.
The clubbing provision says that any income arising from an asset you transfer to your spouse or minor children without consideration must be added to your income. Under tax laws, income also includes a loss. So if the money you gave your spouse earns a profit, that profit is taxed in your hands, and if it ends in a loss, that loss is equally yours to claim.
Ashish Karundia, founder of chartered accounting firm Ashish Karundia & Co., said the provision was never meant to apply only when there is a gain. “If you fund the income-generating asset, the result is yours, whether it is profits or losses.”
Where you can use it
Losses under two heads of income can be clubbed this way. The first is capital gains. If you fund your spouse's investment in mutual funds, shares or house property and those are later sold at a loss, the loss can be set off against your own capital gains.
A short-term capital loss can be offset against both short- and long-term gains, while a long-term loss can only be offset against long-term gains. Anything left unadjusted carries forward for eight years, but only if you file your return by the due date.
The second is income from house property. Say you pay for a property registered in your spouse's name, and it is let out on rent. If there’s a home loan on the property that you are paying, and the interest is higher than the rent in a year, the resulting loss is yours to set off.
Under the new tax regime, losses from house property can be set off up to ₹2 lakh, but only against rental income from house property, and anything above that lapses without carry-forward.
Under the old regime, a loss of up to ₹2 lakh can be set off against any income, and the balance can be carried forward to be set off against rental income in subsequent years.
In all such cases, the loss must come from the money you actually provided. Also, you should not see this as a loophole to exploit. “The law permits losses to be clubbed, but that also means that you cannot leave out the profits from your ITR and follow clubbing only in the year losses arise. If a tax officer notices that pattern, he can reopen your earlier assessments, and then the benefit goes away for both of you,” said Karundia.