Gifted jewellery sale proceeds to your husband? Who pays tax on the interest, dividends and capital gains?

Selling old jewellery and gifting part of the proceeds to your husband may seem like a simple family transaction, but it can have tax implications. If that money is later invested in shares or bonds, the income it generates may not always be taxed in your husband's hands. A reader recently asked whether interest, dividends and capital gains earned by her senior citizen husband from the gifted money would be taxed in his hands or clubbed with hers. Here's what the tax rules say.

The reader explained that she sold some of her old jewellery and gifted nearly half of the sale proceeds to her husband in three to four instalments. Her husband, a senior citizen, invested the money in shares and bonds. He also has his own investments and earns rental income. While both currently have annual income below ₹12 lakh, the reader expects her husband's interest income and rental income to push his total income above the threshold next year. She wanted to know whether the income from investments made using the gifted money would be taxed in her husband's hands or clubbed with her income.

What the tax expert says

According to CA Abhishek Soni, CEO & Co-founder, Tax2win, the husband's rental income from his own property and the income generated from investments made using his own funds will continue to be taxed in his hands.

"However, if the wife gifted a portion of the jewellery sale proceeds to her husband without any consideration, the income earned from investments made out of that gifted amount (such as interest, dividends or capital gains) will generally be clubbed with the wife's income under the clubbing provisions of Section 64 of the Income-tax Act.

Since the husband has invested both his own money and the amount received as a gift from his wife, only the income attributable to the gifted funds will be clubbed with the wife's income. The income earned from his own investments will continue to be taxed in his hands.

Therefore, if the husband's total income exceeds ₹12 lakh only because of the rental income and the income generated from his own investments, that portion will be taxable in his hands. However, the income arising from investments made out of the gifted amount will be taxable in the wife's hands. To determine the correct tax liability, it is important to maintain proper records showing the source of funds used for each investment," said CA Abhishek Soni.