The clubbing of income provision is designed to stop tax avoidance by preventing the transfer of assets or income to family members without adequate consideration. According to Section 99 of the Income-tax Act, 2025, clubbing of income involves specific situations where income earned by one person is included in the taxable income of another person.
However, many people mistakenly believe that they can save on taxes by transferring investments or money to their spouse. So, what’s the truth?
Sandeep Bhalla, partner, Dhruva Advisors, told ET Wealth Online that couples can’t just save on taxes by moving investments between each other.
“The Income Tax (I-T) Department examines the source of funds and may club the income back to the spouse who originally provided the funds,” explains Bhalla.
So, where will the clubbing of income apply for different investments? How can you report it in your income tax filing and what happens if a spouse does not show the clubbed income in their ITR?
Husband has to pay income tax on wife’s FD, gold, shares, interest-free loans under clubbing of income in these cases
Bhalla says clubbing provisions generally apply in cases where one spouse transfers money or an asset to the other spouse without adequate consideration and the transferred funds are subsequently invested to generate income.
Bhalla further explains how spouses can apply clubbing of income to different investments.
Fixed deposits (FDs)
If a husband gifts Rs 10 lakh to his wife and she places the amount in an FD, the interest earned would generally be clubbed and taxed in the husband’s hands. However, income earned from reinvestment of such interest may be taxable in the wife’s hands.
Stocks and shares
If gifted funds are used to purchase shares, the resulting dividend income or capital gains would generally be clubbed with the income of the spouse who provided the funds. An often-overlooked aspect is that clubbing provisions may have relevance not only for income but also for losses arising from investments funded through transferred assets.
Gold investments
If gold is purchased using funds gifted by one spouse to another, any capital gains arising on its sale may be taxable in the hands of the transferor spouse.
Interest-free loans vs gifts
It is important to distinguish a genuine loan from a gift. Clubbing provisions generally apply where there is a transfer of funds or assets without adequate consideration. In case of genuine loan arrangements, the tax treatment would depend on the specific facts and documentation.
In all cases, the key factor is not whose name appears on the investment, but who provided the funds used for making the investment.
Transfer of assets to spouse without adequate consideration
Chartered accountant Milin Bakhai, partner, direct tax, N.A. Shah Associate LLP, points out that if a husband or wife gifts money, shares, property, or other assets to their spouse, the income generated from such assets is generally taxed in the hands of the transferor.
Example: If Mr A gifts Rs 10 lakh to Mrs A and she earns Rs 70,000 as interest from a fixed deposit made out of those funds, the interest income will be taxable in Mr A’s hands.
Remuneration received by spouse from a concern in which the other spouse has substantial interest
Bakhai says salary, commission, fees, or similar payments may be clubbed unless the remuneration is attributable to the spouse’s professional qualifications, expertise, or experience.
Other cases where clubbing of income also applies
Bakhai also explains additional scenarios where income clubbing applies and who is responsible for paying income tax if needed:
Transfer of assets to daughter-in-law
Income arising from assets transferred without adequate consideration to a daughter-in-law is taxable in the hands of the transferor.
Income of a minor child
A minor child’s income is generally clubbed with the income of the parent having the higher total income, subject to certain exceptions.
Why is the clubbing of income not a tax-avoidance measure?
Bakhai says clubbing provisions are anti-tax avoidance measures and do not provide any tax benefit.
“They are designed to prevent taxpayers from reducing their tax liability by transferring assets or income to their spouse or other specified relatives.
How can a taxpayer show the clubbing of income in their ITR?
Bhalla says the income liable to be clubbed should be reported by the transferor spouse under the relevant head of income while filing the return. He explains how income from FD, dividends or capital gains can be reported in ITR if a taxpayer clubs their income with that of their spouse.
• FD interest should be disclosed under “Income from Other Sources”;
• Dividend income should be reported under the relevant dividend schedule; and
• Capital gains from shares, mutual funds, property or gold should be reported under the capital gains schedule.
Taxpayers should maintain proper documentation relating to the source of funds, details of the gift or transfer, investment trail and computation of income being clubbed, explains Bhalla.
Taxpayers need to verify the availability of TDS credit
Citing an example, Bhalla says there may be situations where income is taxable in the hands of the transferor spouse, while the corresponding TDS is reflected in the PAN of the recipient spouse.
“In such a case, proper disclosure and documentation become critical,” says Bhalla.
What are the consequences if a spouse does not show the clubbed income in the ITR?
Bhalla says that failure to disclose income liable to be clubbed may result in additional tax demand, interest, penalties and scrutiny proceedings.
“With AIS, Form 26AS, SFT reporting and data analytics, the Income Tax Department has significantly greater visibility over financial transactions and investments. Consequently, transactions between spouses can increasingly be identified and examined during assessment proceedings,” says Bhalla.
Bakhai says even if someone doesn’t show the clubbed income in their ITR, the Income-Tax Department may include it during its assessment proceedings, and can raise a tax demand along with applicable interest.
“Depending on the facts of the case, penalty for under-reporting or misreporting of income may also be levied,” says Bakhai.
So when you file your income tax return for the financial year 25-26 (FY 25-26, deadline July 31, 2026) and wants to use the clubbing of income provision, keep these things in mind avoid any disciplinary action from the Income Tax Department.
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