Clipped from: https://www.thehindubusinessline.com/portfolio/personal-finance/tax-treatment-on-gifts-given-to-children/article70433927.ece
Taxability of retirement benefits (gratuity, leave encashment, provident fund withdrawal, retrenchment compensation, VRS, etc.) is examinedin the hands of the employee
I received ₹2 crore as retirement benefit from the private company I was working for to my bank account (operated with my wife). From this amount, ₹80 lakh was used for taking GOI bonds — floating rate (₹30 lakh), SCSS (₹30 lakh) — and bank FD (₹20 lakh) in my wife’s name. Details of the above investment now appear in her TIS, downloaded from the I-T department web site.
From the Internet, we get different opinions about the taxability of the above amount. One version is that the above amount can be considered as a gift to my wife and can be fully exempted from tax as per the revised Section 56(2) (vii) & (x) of I-T Act and that this gift need not be declared in her I-T returns. However, she has to pay tax on the income generated from the above investment; do we have to make any gift deed for the above and keep it as a record for future reference/ query from the I-T dept?
Another version is that the definition of relative as per above Section is not applicable to spouse and hence, the gift of ₹80 lakh is not exempted. However, had I given it to my son or daughter, it would have been exempted.
Roy
In this query, we need to discuss the following issues:
* Taxability of retirement benefits received
* Taxability of various deposits of ₹80 lakh made in the name of wife
* Taxability of income earned from the investments made by your wife
Taxability of retirement benefits received: The taxability of retirement benefits (gratuity, leave encashment, provident fund withdrawal, retrenchment compensation, VRS, etc.) is examined in the hands of the employee. It will not make a difference if the money is received in a joint account (joint account with wife here). Hence, taxability will be examined in your hands, depending upon the nature of retirement benefits.
Taxability of various deposits of ₹80 lakh made in wife’s name: As per the provisions of Section 56(2)(x) of the Income Tax Act, 1961 (the Act), if any person has received money in excess of ₹50,000 from another person, then it shall be taxable in the hands of the person receiving the money under the head – ‘Income from other Incomes’. However, gifts received from relatives are not covered under this section and therefore are exempt from tax.
In the definition of relative for individual for the purpose of Section 56(2)(x) of the Act, the spouse of the individual is covered. Hence, based on provisions of the Act, it can be concluded that gift received by your wife (of ₹80 lakh) will not be taxable in her hands and such amount need not be declared in her tax returns. There is no need to prepare gift deed for the amount paid to wife. However, to be on the safer side, you may create a gift deed to respond to any questions from the tax department.
Taxability of income earned from the investments made by your wife: Under Section 64(1)(iv) of the Income Tax Act, if an individual transfers assets to their spouse, via direct or indirect methods, and without appropriate consideration, the income generated from such assets is clubbed with the transferor’s income. The relationship must exist both at the time of transfer of asset and at the time when income arises. In the current facts, the income earned from the deposits made by your wife will be taxable in your hands.
I may add that there are exceptions to this provision when clubbing is not done are as follows:
* Transfers that are made as part of a divorce settlement.
* Transfers that are made prior to marriage.
* If at the time of accruing the income, the relationship between husband and wife ceases.
There are judgments of various Courts, which suggest that income arising out of income earned on transferred assets need not be clubbed. However, income earned on transferred assets should be clubbed.
The author is a practising chartered accountant
Published on January 9, 2026
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