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nism-series-xb-clubbing-of-income-spouse-minor-child-rules[ INVESTMENT ADVISER (LEVEL 2) ]

Under Section 64(1)(iv) of the Income Tax Act, what happens if an individual transfers mutual fund units worth ₹20 Lakhs to their spouse for NIL consideration (without adequate consideration), and the spouse earns ₹2,50,000 in capital gains?

[ A ]The entire capital gain of ₹2,50,000 is CLUBBED and taxed in the hands of the transferor spouse at their applicable tax rate.[ CORRECT ]
[ B ]The capital gain is 100% tax-free.
[ C ]The capital gain is taxed in the hands of the recipient spouse at 5%.
[ D ]The capital gain is confiscated by the Income Tax Department.
Takeaway

Option A is correct: The entire capital gain of ₹2,50,000 is CLUBBED and taxed in the hands of the transferor spouse at their applicable tax rate.

Derivation
Section 64(1)(iv) is a clubbing provision aimed at preventing income-splitting between spouses purely for tax advantage. When an individual transfers an asset such as mutual fund units to their spouse without adequate consideration, any income that asset generates — here, the ₹2,50,000 capital gain the spouse earns on selling those units — is not taxed in the recipient spouse's return at all. Instead, it is clubbed back into the transferor's total income and taxed at the transferor's own applicable rate, exactly as if the transfer had never happened. What matters is simply that the transfer lacked adequate consideration in the first place.
Why the others fail
B — The capital gain is 100% tax-free.
Section 64(1)(iv) explicitly requires that income from assets transferred to a spouse without adequate consideration be clubbed in the transferor's hands, not exempted.
C — The capital gain is taxed in the hands of the recipient spouse at 5%.
There is no concessional 5% clubbing rate under Section 64(1)(iv); clubbed income is taxed at the transferor's own applicable marginal tax rate.
D — The capital gain is confiscated by the Income Tax Department.
Clubbing provisions redirect the tax liability to the transferor's return; they do not result in confiscation of the transferred asset or the income by the tax department.