Who pays tax on Senior Citizen Savings Scheme (SCSS) interest if your spouse gifted you the money?

A reader asked: "I have invested ₹30 lakh in an SCSS account in my name. The money was gifted by my spouse from her retirement corpus. Who has to pay tax on the interest earned?"

According to Mumbai-based tax and investment expert Balwant Jain, "the interest earned on the SCSS deposit will not be taxed in the hands of the account holder if the investment was made entirely from money gifted by the spouse. Instead, the income will be clubbed with the income of the spouse who made the gift, under the clubbing provisions of the Income-tax Act."

When do the clubbing provisions apply?

The income tax department explains that the clubbing provisions under Section 64(1)(iv) apply when "an individual transfers directly or indirectly any asset to his/her spouse otherwise than for adequate consideration and not in connection with an agreement to live apart. The income arising from such asset transferred directly or indirectly is clubbed in the hands of the transferor." The department adds that the provision also applies if the transferred asset is converted into another asset and that new asset generates income.

When do clubbing provisions not apply?

As per the tax department, the clubbing provisions under Section 64(1)(iv) do not apply in certain situations.

As per the department's FAQs: "Section 64(1)(iv) will not apply if the asset is transferred for adequate consideration, in connection with an agreement to live apart, before marriage, or when the relationship of husband and wife does not subsist either at the time of transfer of such asset or at the time of accrual of income."

To put it simply, the clubbing rules are not universal. They do not apply if the asset is transferred for adequate consideration, under an agreement to live apart, before marriage, or if the recipient is no longer the spouse when the income is earned.

Which ITR form should be used?

Taxpayers with income taxable under the clubbing provisions generally need to file ITR-2 or ITR-3.They must also include the required disclosure relating to clubbed income in their return.