One of the most misunderstood areas of personal taxation is the clubbing provisions. Many people innocently transfer money or assets to spouses for household planning, investments, or gifting purposes, assuming the resulting income will be taxed independently. But the Income Tax Act sees it differently.
Section 64(1)(iv) was introduced to prevent individuals from reducing their tax liability by shifting income-generating assets to their spouse & claiming that the income belongs to them. In simple terms, if an individual transfers an asset to their spouse for no consideration, or for inadequate consideration, the income from that asset continues to be taxed in the hands of the transferor, not the spouse.
This provision may sound harsh initially, but it promotes fairness & prevents misuse, especially in high-income families where asset transfers were historically used to split income into lower tax brackets.
What the Law Says — In Practical Language
Section 64(1)(iv) applies when:
- An individual transfers (directly or indirectly) any asset to their spouse.
- The transfer is made without adequate consideration (in simple words, no real payment or inadequate payment)."
- The transferred asset generates income — such as interest, rent, dividends, or capital gains.
In such cases, the income doesn’t get taxed in the spouse’s hands. Instead, the law treats it as the transferor’s income.
For example, if an individual transfers ₹2,00,000 to their spouse & they place it in a fixed deposit, earning interest of ₹5,000, Section 64(1)(iv) will apply. The interest earned is treated as if the transferor earned it themselves. The income from assets transferred to a spouse becomes taxable in the hands of the transferor automatically.
The purpose is straightforward: stop taxpayers from shifting investment income within the family to reduce tax liability.
Also Read: A Complete Guide to Draft Assessment and Dispute Resolution Panel (DRP)
Examples That Make Section 64(1)(iv) Easy to Understand
Example 1 — Fixed Deposit by Spouse
You transfer ₹1,50,000 to your spouse. They put it in an FD earning ₹9,000 interest annually.
Even though the FD is in your spouse’s name, the ₹9,000 interest is added back to your income because the asset (the money) was transferred without consideration.
Example 2 — Indirect Transfer
Instead of transferring the asset directly, you route it through a relative or friend. The Income Tax Act still considers it an indirect transfer.
If the spouse earns income from that asset, Section 64(1)(iv) applies.
Example 3 — Asset Growth After Transfer
You transfer shares worth ₹50,000 to your spouse.
They later sell them for ₹80,000.
The capital gain is clubbed in your hands because the income arises from the transferred asset.
These examples show that the law focuses on ownership of the original asset & not how or where the spouse uses it later.
When Section 64(1)(iv) Does NOT Apply
Understanding the exceptions is equally important. Clubbing does not apply when:
- Adequate Consideration Is Paid
If your spouse genuinely pays you for the asset at fair market value, clubbing does not apply.
- Transfer Happens as Part of a Divorce Settlement
Court-approved divorce-related transfers are excluded.
- Income from Further Investments
If the spouse reinvests the income generated from the original asset, the secondary income is not clubbed."
This is known as indirect income exclusion.
For example:
You transfer money → spouse earns ₹5,000 interest (clubbed in your income) → spouse reinvests that ₹5,000 → earns ₹500 more.
The additional ₹500 will be taxed in the spouse’s hands.
These exceptions provide useful planning opportunities when done ethically & transparently.
Also Read: Section 64 of the Income Tax Act – Clubbing of Income
Why This Rule Is Important for Modern Families
Many couples share finances openly, and transfers happen for various reasons — from funding personal expenses to enabling independent investments. Without understanding clubbing rules, tax liabilities can become complicated.
Section 64(1)(iv) ensures:
✔ Transparency between spouses when transferring assets
✔ Accurate reporting of income
✔ Prevention of artificial tax savings
✔ Proper documentation for scrutiny or assessment
It also aligns with the Income Tax Department’s focus on linking PAN, AIS data, & investment trails, which makes income-origin tracking more robust than ever.
How to Stay Compliant Without Unwanted Tax Surprises
- Avoid casual transfers of money or assets to spouse
Treat transfers as real transfers only when necessary.
- Maintain documentation
If adequate consideration was paid, keep proof. The burden of proof lies with the taxpayer.
- Separate personal and investment accounts
This helps track the origin of investments & avoids accidental clubbing.
- Use joint accounts strategically
Joint accounts can make tracing difficult. Ensure clarity on who contributed what.
- Speak to a CA before making large transfers
Professional guidance helps avoid heavy notices, reassessments, or disputes later.
A Realistic Scenario Most Couples Face Today
A young couple plans their investments together. One spouse earns significantly more & transfers money to the other to build a mutual fund portfolio in their name. At year-end, the mutual fund generates gains, and they assume the tax liability rests with the lower-earning spouse.
But under Section 64(1)(iv), the income arising from assets transferred to the spouse becomes taxable in the hands of the transferor.
Many taxpayers discover this only during filing, assessment, or after receiving AIS mismatch alerts — often too late.
Understanding this provision early helps avoid unexpected tax liability & ensures smoother tax compliance.
Also Read: Tax on Gifts, Cash, and Property Received Without Consideration
Conclusion
Section 64(1)(iv) of the Income Tax Act is one of those provisions that every salary earner, investor, and homemaker-led family should understand. It clarifies that if an individual transfers assets to their spouse without adequate consideration, the income arising from those assets is clubbed and taxed in the hands of the transferor.
By knowing how clubbing works — and the exceptions available — taxpayers can plan better, avoid unintentional errors, & ensure compliance while still achieving their financial goals as a family.
Need clarity on clubbing rules or tax planning for couples? Talk to a CA at CallMyCA.com — expert guidance is just one click away.
