Clubbing of Spouse’s Rental or Interest Income: How TaxBuddy Handles Related Income Tax Notices
- Asharam Swain
- 2 days ago
- 8 min read
Clubbing of a spouse’s rental or interest income is a closely monitored area under Indian tax law, especially when assets are transferred without adequate consideration. Section 64 of the Income Tax Act requires such income to be added back to the transferor’s total income to prevent tax avoidance through income shifting. Many taxpayers face income tax notices due to mismatches in AIS or bank reporting, even when income is credited to the spouse’s account. Understanding when clubbing applies, how it must be reported, and how notices are handled helps avoid penalties and prolonged scrutiny.
Table of Contents
What Is Clubbing of Income Under Section 64 of the Income Tax Act
Clubbing of income is a provision designed to prevent tax avoidance by shifting income to family members who fall into a lower tax bracket. Section 64 of the Income Tax Act, 1961 requires certain incomes to be added back to the income of the person who transferred the asset, even if the income is earned in another person’s name. In the case of spouses, income arising from assets transferred without adequate consideration after marriage does not remain taxable in the spouse’s hands. Instead, it is included in the total income of the transferor. This applies irrespective of whose bank account receives the income or who manages the asset.
When Spouse’s Rental Income Gets Clubbed
Rental income earned by a spouse becomes subject to clubbing when the property generating that rent was transferred without adequate consideration. This includes outright gifts of immovable property or indirect transfers where the funding source can be traced back to the transferor. Even if the rent is credited to the spouse’s bank account and the property stands in the spouse’s name, the income is treated as taxable in the hands of the transferor. Deductions such as the standard deduction for house property are allowed, but the taxable income after deductions must be added to the transferor’s return.
When Spouse’s Interest Income Gets Clubbed
Interest income is commonly clubbed in cases involving fixed deposits, bonds, or mutual funds created using funds gifted to a spouse after marriage. If the original investment amount was transferred without adequate consideration, the interest earned each year is added to the transferor’s income under the head “Income from Other Sources.” However, only the income generated from the original transferred amount is clubbed. Any further income earned on reinvested interest is taxed in the spouse’s own hands, provided the original clubbing has already been applied.
Exceptions Where Clubbing Does Not Apply
Clubbing provisions do not apply in every transfer between spouses. Income is not clubbed when the asset was transferred before marriage, when adequate consideration was paid, or when the transfer was made under an agreement to live apart. Clubbing is also not applicable if the spouse earns income independently through personal skills, technical expertise, or professional qualifications, even if the other spouse holds a substantial interest in the business. Proper documentation plays a key role in establishing these exceptions during assessments or notice proceedings.
Is Clubbing of Income Allowed in the New Tax Regime
The applicability of clubbing provisions does not change under the new tax regime. Section 64 continues to operate in the same manner, and income that qualifies for clubbing must still be added to the transferor’s total income. What changes under the new regime is the availability of deductions. For example, deductions linked to house property losses or certain allowances may be restricted. Therefore, while clubbing rules remain intact, the tax impact may differ depending on the regime selected.
How Clubbing of Income Works in the Old Tax Regime
Under the old tax regime, clubbed income is added to the relevant income head after allowing applicable deductions. In the case of rental income, deductions such as the standard 30 percent deduction and interest on housing loans are available before clubbing the net income. For interest income, the gross interest is added after applying eligible deductions under the law. This regime often results in a lower tax outgo when deductions are properly claimed, making accurate reporting especially important.
How Clubbed Rental and Interest Income Is Reported in ITR
Clubbing of income is disclosed in the transferor’s income tax return, usually in ITR-2 or ITR-3. Details of the clubbed income are reported through Schedule SPI, which captures the nature of income, the relationship with the spouse, and the amount clubbed. The income itself is included under the relevant head, such as “Income from House Property” or “Income from Other Sources.” Supporting documents such as gift deeds, bank statements, and ownership proofs should be retained for verification.
Common Reasons Income Tax Notices Are Issued for Clubbing
Income tax notices related to clubbing often arise due to mismatches in data reported across different systems. Rental or interest credits appearing in a spouse’s Annual Information Statement without corresponding disclosure in the transferor’s return is a common trigger. Notices may also be issued when property ownership details, loan interest claims, or source-of-funds explanations are missing or inconsistent. Automated data matching has made such discrepancies easier for the tax department to identify.
How to Respond to Clubbing-Related Income Tax Notices
Responding to a clubbing-related notice requires a clear explanation supported by documents. The response should establish whether clubbing applies and, if so, demonstrate that the income has already been correctly offered to tax. If clubbing does not apply, evidence such as proof of consideration, pre-marriage transfers, or independent income sources must be submitted. Timely and structured responses reduce the risk of reassessment or penalty proceedings.
How TaxBuddy Detects Clubbing and Manages Notice Responses
TaxBuddy uses data-driven checks to identify potential clubbing scenarios during the filing process by analysing income patterns, AIS data, and ownership indicators. This early detection helps ensure correct disclosure before notices arise. In cases where notices are issued, TaxBuddy assists with drafting accurate responses, organising supporting documents, and providing expert review. This structured approach reduces errors and improves compliance outcomes without unnecessary back-and-forth with the department.
Consequences of Incorrect Reporting or Non-Disclosure
Failure to report clubbed income correctly can lead to reassessment, additional tax demands, interest, and penalties for under-reporting or misreporting of income. In serious cases, penalties can be substantial, and prolonged scrutiny may follow. Correct reporting at the filing stage and prompt resolution of discrepancies significantly reduce these risks and help maintain a clean compliance record.
Conclusion
Clubbing of a spouse’s rental or interest income is a technical but heavily scrutinised area of taxation. Most disputes arise from incomplete disclosure rather than intentional non-compliance. A clear understanding of Section 64, accurate reporting, and timely responses to notices help avoid penalties and stress. For anyone looking for assistance in tax filing, it is advisable to download the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.
FAQs
Q1. Does TaxBuddy offer both self-filing and expert-assisted plans for ITR filing, or only expert-assisted options?
TaxBuddy offers both self-filing and expert-assisted plans to suit different levels of tax complexity. The self-filing option is designed for taxpayers with straightforward income sources, where automated systems prefill details from Form 16, AIS, and bank data, reducing manual effort. Expert-assisted plans are more suitable when the return involves complexities such as clubbing of spouse’s income, multiple properties, capital gains, or ongoing income tax notices. In such cases, a qualified tax professional reviews disclosures, validates documents, and ensures compliance with provisions like Section 64.
Q2. Which is the best site to file ITR?
The Income Tax Department’s official e-filing portal is the primary and mandatory platform for filing income tax returns in India. However, many taxpayers prefer using guided platforms such as TaxBuddy because they simplify the filing journey. These platforms help identify reporting gaps, highlight issues like clubbing of income, and reduce errors caused by manual entry. The return is ultimately filed on the government portal, but the preparation and validation process becomes smoother and more accurate.
Q3. Where to file an income tax return?
Income tax returns are filed on the Income Tax Department’s e-filing portal. Taxpayers can either file directly by logging into the portal or use authorised platforms that integrate with it. These platforms prepare the return, perform validations, and submit it electronically on the taxpayer’s behalf. Regardless of the method chosen, the final filing and acknowledgment are generated through the official portal.
Q4. Does clubbing apply if income is credited to the spouse’s bank account?
Yes, clubbing applies irrespective of whose bank account receives the income. If the underlying asset generating rental or interest income was transferred to the spouse without adequate consideration after marriage, the income must be included in the transferor’s tax return. The tax law focuses on the source of the asset rather than the destination of income, which is why bank account credit alone does not determine taxability.
Q5. Is rental income from a gifted house always clubbed?
Rental income is clubbed when the house property was gifted to the spouse without adequate consideration after marriage. In such cases, the rental income is taxable in the hands of the transferor, even if the property is registered in the spouse’s name. However, clubbing does not apply if the property was transferred before marriage or if the spouse paid fair consideration supported by proper documentation. Each case depends heavily on ownership records and funding sources.
Q6. Is interest from an FD opened with gifted funds clubbed every year?
Interest earned on the original amount gifted to a spouse is clubbed every year with the transferor’s income. This continues as long as the principal amount can be traced back to the gift. However, interest earned on reinvested interest is not clubbed again. That subsequent income is taxed in the spouse’s hands, provided the original clubbing has already been applied correctly in earlier years.
Q7. Does clubbing apply to jointly owned property?
Clubbing does not apply to jointly owned property when both spouses have contributed proportionately to the purchase and ownership is clearly defined. Each co-owner is taxed only on their respective share of rental income or capital gains. Clubbing may arise if one spouse funds a larger share while ownership is shown differently, or if contributions cannot be substantiated through bank records or agreements.
Q8. How is clubbed income shown in the income tax return?
Clubbed income is reported in the transferor’s income tax return under the relevant income head, such as Income from House Property or Income from Other Sources. Additionally, details of the clubbing arrangement are disclosed in Schedule SPI, which captures the relationship, nature of income, and amount being clubbed. This disclosure ensures transparency and helps avoid automated mismatches during processing.
Q9. Can deductions be claimed on clubbed rental income?
Yes, deductions available under the law can be claimed before clubbing rental income, subject to the tax regime chosen. Under the old tax regime, deductions such as the standard 30 percent deduction for house property and interest on housing loans are allowed. The net income after deductions is then clubbed with the transferor’s total income. Under the new tax regime, certain deductions may not be available, which can affect the overall tax outcome.
Q10. Are clubbing rules different under the new tax regime?
The applicability of clubbing provisions remains unchanged under the new tax regime. Section 64 continues to apply in the same manner. The difference lies in the deductions and exemptions available. While clubbing rules determine whose income it is, the tax regime determines how much of that income is taxable after deductions. This distinction is important while comparing tax liability between regimes.
Q11. What documents are needed to reply to a clubbing notice?
Responding to a clubbing-related notice usually requires documents that establish ownership, source of funds, and applicability or non-applicability of Section 64. Common documents include property purchase deeds, gift deeds, bank statements showing fund transfers, loan agreements, and proof of consideration paid by the spouse. Clear documentation helps resolve notices faster and reduces the risk of reassessment.
Q12. Can TaxBuddy assist with clubbing-related income tax notices?
Yes, TaxBuddy provides structured support for handling clubbing-related income tax notices. The platform analyses AIS and return data to identify the issue, helps organise supporting documents, and prepares clear, compliant responses. Expert review ensures that explanations align with legal provisions and reporting standards, reducing the chances of penalties or prolonged scrutiny.
