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Gifts to Son’s Wife on the occasion of Marriage can help save smart tax for a lifetime!

      The abolition of Gift-tax since 1st October, 1998 has also thrown open several opportunities for planning to reduce a taxpayer’s income-tax and wealth-tax liabilities. Moreover even under the provisions of Section 56(2) as effective from 1st September, 2004 (and further amended w.e.f. 1st April, 2006 and 1st October, 2009), seeking to treat gifts exceeding Rs.50,000 as income, gifts made to ‘a relative’ have been duly exempted.

      However the ‘clubbing provisions’ under both the Income-tax and Wealth-tax Acts, seek to guard against tax-avoidance through the route of gifts to close members of the family such as spouse and son’s wife.


      Section 64(1) of the Income-tax Act provides that in computing the total income of an individual, the income arising to the spouse or son’s wife from assets gifted to them by the individual would be clubbed with the total income of the individual.

      Similarly Section 4 of the Wealth-tax Act also provides for inclusion of such gifted assets by the individual to the spouse or son’s wife in the computation of net wealth.

      Are there any practical and lawful ways to overcome the clubbing provisions? This is a common question that would naturally arise in the context of the provisions of Section 64 of the Income-tax Act and Section 4 of the Wealth-tax Act referred to above. Discussed below are some thoughts which focus attention on scrubbing the clubbing provisions.

      In order that the relevant clubbing provisions under Section 64 of the Income-tax Act or under Section 4 of the Wealth-tax Act are attracted, it is essential that the relationship of spouse must exist between the individual and the concerned person on the date when the assets are transferred. If such a relationship does not exist on that date, the question of clubbing would not arise. The Supreme Court has made it clear in the case of ‘Philip John Plasket Thomas vs. CIT’ 49 ITR 97(SC), that in order to attract the clubbing provisions, the relationship of spouse must exist both at the time when the transfer is made and at the time when the income is earned by the transferee.

      In view of this principle enunciated by the Supreme Court, the transfer by an individual, to his would be spouse (fiancé) or his son’s would be wife (i.e. his would-be daughter-in-law), prior to the date of marriage, would not make him liable to tax in respect of the income arising to the transferee even after the date of marriage. This idea can be usefully relied upon from the tax-planning point of view in appropriate cases, by planning pre-marital gifts which would be outside the scope of the clubbing provisions.

      In the context of the provisions of Section 56(2)(vii) treating the value of gifts exceeding Rs.50,000 received from a non-relative as income in the hands of the recipient, due care must be taken to ensure that such gifts are made to the would-be spouse or son’s would-be wife only ‘on the occasion of marriage.’ Since gifts received by an individual even from a non-relative, but on the occasion of marriage are covered as exempt under Section 56(2)(vii), no liability to income-tax would arise in respect of the receipt of such gifts, irrespective of their value.

      Obviously, in such cases it must be contended that the respective gifts were made on the occasion of, but before the completion of the marriage rituals, pursuant to which the relationship as contemplated under Section 64 would come into being.


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