Mukesh Patel.in
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TAX PLANNING FOR GIFTS TO WIFE!

Remember that income from accumulated income is outside the purview of Section 64!

      In the context of the clubbing provisions under Section 64 of the Income-tax Act and Section 4 of the Wealth-tax act, it is important to note that the income liable for clubbing is such income arising from the amount of the gifted asset and the wealth liable for clubbing is such wealth representing the amount of the gifted asset. If the transferee continues to accumulate the income arising from the gifted asset and further income is generated from such accumulated income, such further income is not liable for clubbing under Section 64. Similarly for purposes of wealth-tax, such accretions to be gifted asset are also not liable for clubbing.

BUILDING UP INCOME FROM ACCUMULATED INCOME OF GIFTED ASSETS

      This principle can be usefully employed to derive gainful planning as will be apparent from the illustration given below:

Illustration: Mr. X gives a gift of Rs.10,00,000 to his wife Mrs. X. Mrs. X invests the same in Government of India Saving Bonds bearing interest @ 8% p.a. At the end of the first year, the interest of Rs.80,000 received by Mrs. X on the gifted amount of Rs.10,00,000 will be clubbed with the income of Mr. X. Presuming that this interest of Rs.80,000 is accumulated and reinvested by Mrs. X in similar Bonds bearing 8% interest p.a., for the second year, the interest received by her would be Rs.80,000 on the Bonds of gifted amount of Rs.10,00,000 and Rs.6,400 being interest on the accumulated amount of Rs.80,000.

For the second year, although the income received by Mrs. X is Rs.86,400, the amount liable for clubbing in the income of Rs. X would be only Rs.80,000 representing the income of the gifted asset. Rs.6,400 representing interest on accumulated income would be treated as the separate income of Mrs. X for tax purposes, not liable for clubbing with the income of her husband, Mr. X. Similarly, such income arising on the accumulated income year after year will remain outside the scope of Section 64.

Similarly, if the husband gifts equity shares of a company to his wife and thereafter the wife is allotted bonus shares by the company, the bonus shares cannot be treated as assets transferred by the husband. In such a case, although the capital gains from the equity shares gifted would be liable for clubbing under Section 64, such income arising from the bonus shares would be outside the scope of the clubbing provisions. This principle has been well established by a number of Court decisions, noteworthy among them being the cases of ‘Popatlal Bhikhamchand vs. CIT’ 36 ITR 57(Bom.) and ‘Sevantilal Maneklal Sheth vs. CIT’ 57 ITR 45(Bom.).

INVESTMENT OF GIFTED FUNDS IN TAX-FREE INVESTMENTS

       The impact of the clubbing provisions under Section 64 can be effectively blunted by investing the gifted funds in such investments, the income of which is totally free from income-tax under Section 10 of the Income-tax Act. Tax-free investments of this type would enable the transferor to claim that no liability to income-tax would arise in his case on income from such investments, notwithstanding the fact that such investments have been made by the transferee spouse or son’s wife out of the funds gifted by the transferor. Moreover, the accumulated income from such tax-free investments can be reinvested in taxable investments as per the planning suggested earlier, since such ‘income from accumulated income’ would be outside the purview of Section 64 of the Income-tax Act. This point will be well appreciated from the Illustration given below:

Illustration: Mr. P gives a gift of Rs.10,00,000 to his wife Mrs. P. Mrs. P invests the same in a debt-based Mutual Fund yielding 6% annual dividend. At the end of the first year, the interest of Rs.60,000 received by Mrs. P on the gifted amount of Rs.10,00,000 would not attract the clubbing provisions, since the said income would be totally exempt under Section 10(35) of the Income-tax Act. If the tax free interest of Rs.60,000 is invested by Mrs. P in a private deposit bearing 12% interest per annum, for the second year, the interest received by her would be Rs.60,000 on the gifted amount of Rs.10,00,000 invested in the Mutual Fund and Rs.7,200 being interest on the amount of Rs.60,000 invested in the private deposit.

For the second year, the income of Rs.60,000 would be exempt under Section 10(35) and income of Rs.7,200 representing ‘income from accumulated income’ would be outside the scope of Section 64 and hence not liable for clubbing with the income of her husband. The same position can be continued in the subsequent years and by playing smart, the clubbing provisions can be lawfully avoided.

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