As per the provisions of Section 64 of Income Tax Act, any income which arises to the spouse from the asset gifted from time to time is required to be clubbed with the income of the spouse who had made the gift
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I have been married for 25 years. My wife is a home maker. She is a B.Com. and has been doing share trading for past 12-13 years. She did not have taxable income all these years so did not file any ITR in the past. But during the financial year 2020-21 her income exceeded the basic exemption limit and as I understand she has to file her ITR by 31st December, 2021. The money to do the share trading was given by me from time to time. Is her income to be clubbed with my income or she can file the ITR showing the full income as her income. Please guide me. Since she is trading herself and is a graduate, is this by itself not sufficient to declare this income as her income?
Answer: As per the provisions of Indian tax laws, any gift made by one spouse to another is fully tax free in the hands of the recipient and has no tax implication whatsoever for both the spouses. However as per the provisions of Section 64 of Income Tax Act, any income which arises to the spouse from the asset gifted from time to time is required to be clubbed with the income of the spouse who had made the gift. The clubbing provision will apply as long as the marriage subsists. If the asset is converted into any other form the clubbing provisions will still continue to apply to the extent of value of the original gift. Please note that the clubbing provisions apply only to the original amount of gift and do not apply on the income which arises due to further investment made of such income. The money given by you from time to time to your wife is to be treated as gift made by you and the income in relation to such original amounts of gifts made at various points in time was required to be clubbed in your income since beginning. The clubbing provisions will apply even if she is an educated lady and has earned the income by applying her knowledge and skills. Since the time to revise the ITR for the financial year 2019-20 and prior period is already over, you cannot do anything now for past income.
However, I would advise you to start clubbing the income relatable to the money gifted by you to her in your income and for rest of the income she has to file her own ITR if the balance income still exceeds the basic exemption limit. I understand the difficulty in segregating the income between the one directly attributable to the gift given by you and the balance income which arose due to investing the income already clubbed. You can do this allocation by dividing the aggregate income in the respective ratio of aggregate of all the gifts made and balance amount as reduced from her total capital.
In case the entire money invested represents savings out of the pin money given by you to run the household, the clubbing provisions will not apply and therefore entire income can be shown as her income. What amount can be treated as pin money and not gift by the husband various factors have to be considered like income of the husband, amount given by the husband as household allowance, reasonable monthly household expense etc. I would like to give you a word of caution. Do not try to use it as tax avoidance tool and add club the relatable portion of her income with your income on logical and rational basis.