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Gift of House Property to spouse – Taxation thereof

Gift of House Property to spouse – Taxation thereof –

Situation: - If a person gifts a house property to his/her spouse, taxation arising out of this transfer and taxation of income earned from this house property is discussed below.

Taxation of gifted House Property :- If a person gifts any house property to his/her spouse the gift is exempt from taxation in view of Second Proviso to Sec. 56(2)(vii)[applicable till 31.03.2017] or Proviso to 56(2)(x)[applicable from 01.04.2017] because if a person receives any gift from his relative defined in these Provisos, the transaction is not taxable under this section. Thus the above gift is totally exempt from tax.

Taxation of income arising from this house property :- Once the above gift is complete and any income arises from the above gifted  property how the income will be taxed under various provision of the Act ?

Relevant portion of Section 64 is reproduced as under :-
"Section 64. (1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly—(iv) subject to the provisions of clause (i) of section 27, to the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart ;"

Thus if the house property has been transferred for adequate consideration or agreement to live apart, any income arising from this gifted house property will not be clubbed under Sec. 64(1)(iv) . Now if both the above conditions are not satisfied, income arising from this house property will be either clubbed u/s 64(1)(iv) or taxed u/s 22 in the hand of the spouse who has made the gift. It is because Clause (iv) of Sub-Section (1) of Sec. 64 starts with “Subject to provisions of clause (i) of Section 27”, so subject to the section 27(i) any income arising directly or indirectly from this property will be clubbed in the hands of the donor spouse. 

Clasue (i) of Section 27 is reproduced below
"27. For the purposes of sections 22 to 26— (i) an individual who transfers otherwise than for adequate consideration any house property to his or her spouse, not being a transfer in connection with an agreement to live apart, or to a minor child not being a married daughter, shall be deemed to be the owner of the house property so transferred;"

Thus the conditions laid down in this clause are same as u/s 64(1)(iv) i.e. if the gift has been made or asset has been transferred for adequate consideration or agreement to live apart, provisions of Sec. 27(i) will not apply, otherwise clause(i) of Sec. 27 shall apply and the donor shall be treated owner of the above house property and he will be taxed u/s 22 of the Act for the purposes of house property income while any other income derived from this house property will be clubbed in the hands of donor spouse u/s 64(1)(iv). Now the question arises when clubbing provision in respect of house property gifted to spouse already exists in Sec. 64 why house property income is not clubbed u/s 64 and is separately taxed  u/s 22 rws 27(i). Actually for clubbing any income there must a real income while u/s 22 we tax Annual Letting Value which may be not be real income but notional income in some cases. 

e.g. if I Mr. X owns two houses A & B and he gifts house B to his wife Mrs. Y without an agreement to live apart or without receiving full consideration. Now both own a house property separately and if both are not rented houses, House  A will be SOP for Mr. X and house B will be SOP for Mrs. Y so in this case there is no real income which can be clubbed. But under provisions of Sec. 27(1) Mr. X shall be treated owner of both houses and notional income of one house will be taxed in his hands. Therefore due to deeming provision “Income from House Property” is not clubbed u/s 64 but taxed as owner u/s 22. Any other income (other than house property income) arising from this house property shall be clubbed in the hands of Mr. X. For example if Mrs. Y sells the house, Capital Gains will be clubbed u/s 64(1)(iv) in the hands of Mr. X. Here a question arises when it is clubbed whether deeming provision 50 C shall apply ? The answer is Yes because though it is a deeming provision yet it shall apply in case as income has been quantified u/s 50C

Conclusion :- If a person gifts any house property to his or her spouse, the gift is not taxable. After gift income under the head “House Property” is taxable u/s 22 rws 27(i) and any other income earned from this house property shall be clubbed u/s 64(1)(iv) in the hands of the donor spouse.