If a husband transfers (gifts) his shares or mutual funds to his wife through an off-market transfer, and later the wife sells those securities for a profit, who is liable to pay the capital gains tax — the husband or the wife?
Is the gain considered her income, or does clubbing of income apply under Section 64, making it taxable in the husband’s hands?
Looking for clarity on the correct tax treatment.
I transferred a chunk of my mutual fund units to my wife—just like you’re asking about—because she wanted to start managing a small investment portfolio on her own. At firstt, I assumed the profits she made later would be taxed as her income. But when the time came to file returns, I got a shock. My CA smiled and said, “Nice try, but Section 64 doesn’t let you escape so easily!” Basically, when a husband gifts shares or mutual funds to his wife, it’s legally allowed, and the transfer itself attracts no tax. However, the profit that she earns when she sells those assets later isn’t fully hers from a tax perspective. Under Section 64 of the Income Tax Act, any income arising from assets transferred to a spouse without adequate consideration gets clubbed with the income of the transferor—that’s the husband in this case. So, even though the sale actually happens (https://itaxsoftware.net) in her name, the capital gains are added to the husband’s income and taxed accordingly.
Now, here’s where things get interesting based on what I learned the hard way. Let’s say your wife sells the shares or mutual funds for a profit after you gifted them to her—those gains will be taxed in your hands because of the clubbing provisions. The only way it becomes her independent income is if she reinvests the proceeds into new assets. Any future income she earns from investments made with the sale proceeds is treated as her own and will not be clubbed with your income. I still remember the day my wife reinvested her proceeds into a different fund, proudly declaring, “This one is fully mine now!” And she was absolutely right—the taxman finally agreed. So, in short: the initial profit on your gifted securities will get clubbed with your income, but anything she earns afterwards using that money becomes her taxable income. Hope this clears things up