Gifted a house to your spouse? You may still have to pay tax on the rental income: Know 7 key things before filing ITR for AY 2026-27

Many taxpayers transfer or gift a house property to their spouse for family, financial, or estate planning purposes. Once the property stands in the spouse's name and the spouse starts receiving rent from tenants, it is commonly believed that the rental income will automatically be taxable in the spouse's hands.

However, the Income-Tax Act, 1961 contains specific provisions that can result in the rental income being taxed in the hands of the person who gifted the property. Taxpayers should, therefore, understand the interaction between the clubbing provisions and the concept of deemed ownership before filing their income tax returns (ITRs).

Every taxpayer who has gifted a house property to his or her spouse should be aware of the following seven key things before filing the ITR for AY 2026-27.

1. Gifting is tax-neutral, but the rental income may not be

A husband may gift a house property to his wife, or a wife may gift a house property to her husband without any consideration. Under Section 47(iii) of the Income-tax Act, a transfer of a capital asset by way of gift is not regarded as a transfer for capital gains purposes and, therefore, does not attract capital gains tax.

Likewise, the spouse receiving the property is not liable to be taxed on the value of the gift, since Section 56(2)(x) exempts gifts received from specified relatives, including a spouse.
However, taxpayers should not assume that the tax implications end with the gift. While the transfer of the property may be tax-neutral, the rental income earned from the gifted property may still be taxable in the hands of the spouse who made the gift because of the clubbing and deemed-ownership provisions contained in the Act.

Also read: ITR filing season AY 2026-27: Received Section 143(2) notice for AY 2025-26? What it means and how to respond

2. Section 27 treats the transferor spouse as the deemed owner

Section 27 of the Income-Tax Act, 1961 provides that where an individual transfers a house property to his or her spouse otherwise than for adequate consideration and not in connection with an agreement to live apart, the transferor shall be deemed to be the owner of that house property for the purposes of Sections 22 to 26 relating to taxation of income from house property.

In other words, even though the legal title of the property may stand in the name of the spouse, the Income-Tax Act continues to treat the transferor as the owner for the purpose of computing income from house property.

Also read: Salaried employees beware! These 5 mistakes during ITR filing can trigger unexpected tax demands

What does this mean for taxpayers?

Where the spouse lets out the gifted property and receives rental income, such rental income will, by virtue of the deemed ownership provisions of Section 27, be taxable in the hands of the spouse who transferred the property.

3. Section 64 complements the deemed ownership rule

Section 64(1)(iv) of the Income-tax Act provides that income arising directly or indirectly to the spouse of an individual from assets transferred to the spouse without adequate consideration shall be included in the income of the transferor.

In the case of a house property gifted to a spouse, Section 27 contains a specific provision deeming the transferor to be the owner of the property for the purposes of computing income from house property. Consequently, the rental income from such property is taxable in the hands of the transferor spouse and not in the hands of the recipient spouse.

For example, if Mr. Raj gifts a residential flat to his wife, Mrs. Priya, and the flat is subsequently let out, the fact that the property stands in Mrs. Priya's name and the rent is received by her does not make the rental income taxable in her hands. By virtue of Section 27, Mr. Raj continues to be treated as the deemed owner, and the rental income is taxable in his hands under the head "Income from House Property."

4. Sale of the gifted property does not end the clubbing provisions

Where the spouse subsequently sells the house property received as a gift, the capital gains shall first be computed in the hands of the spouse, being the legal owner and transferor of the property.

However, by virtue of Section 64(1)(iv), the capital gains arising from the sale of the gifted property will be included in, and taxed as part of, the income of the spouse who originally gifted the property.

The spouse would also be entitled to compute the capital gains in accordance with the applicable provisions relating to the cost of acquisition and the period of holding.

5. Different rules apply where the property is transferred under an agreement to live apart

The tax consequences are different when a house property is transferred by one spouse to the other in connection with an agreement to live apart.

Both Section 27 and Section 64(1)(iv) of the Income-Tax Act specifically exclude transfers made pursuant to an agreement to live apart from the operation of the deemed ownership and clubbing provisions.

Accordingly, in such cases, the spouse receiving the property will be treated as the owner of the property for income-tax purposes. Consequently, any rental income derived from the property will be taxable in the hands of the recipient spouse and not in the hands of the spouse who transferred the property.

6. Gifting money instead of the house does not avoid clubbing

Suppose Mr. A gifts Rs 50 lakh to his wife and she utilizes the gifted amount to purchase a house property in her own name.

In such a case, the clubbing provisions contained in Section 64(1)(iv) would apply because the rental income from the house can be directly traced to the funds gifted by Mr. A. Although the house property is legally owned by Mrs. A, the income arises indirectly from the asset transferred by the husband.

Accordingly, the rental income derived from the house purchased out of the gifted funds would be included in the income of Mr. A and taxable in his hands.

7. Report clubbed income in the correct ITR form and Schedule SPI

Taxpayers should not report the rental income in the return of the spouse merely because the property stands in the spouse's name. Instead, the income should be computed and declared in the return of the transferor spouse under the head "Income from House Property."

The clubbed income should also be disclosed in Schedule SPI (Specified Persons Income) of the applicable ITR form by furnishing the prescribed particulars of the spouse and the amount of income clubbed under Section 64.

At a glance:

Situation	Whose Income Is It?
House gifted to spouse and let out	Spouse who gifted the house
House transferred under an agreement to live apart	Recipient spouse
House purchased from money gifted by spouse	Spouse who gifted the money
House sold by spouse after receiving it as a gift	Capital gains are clubbed with the income of the spouse who gifted the property

Common mistakes to avoid

Taxpayers frequently commit the following errors while reporting rental income from a house property gifted to a spouse:

• Reporting the rental income in the spouse's return merely because the property is registered in the spouse's name.
• Ignoring the deemed ownership provisions contained in Section 27 of the Income-Tax Act.
• Assuming that execution of a gift deed automatically transfers the tax liability on the rental income to the recipient spouse.
• Selecting ITR-1 or ITR-4, where ITR-2 or ITR-3 is required for reporting clubbed income in Schedule SPI (Specified Person's Income).
• Offering the rental income to tax in the transferor's return but failing to disclose the clubbed income in Schedule SPI (Specified Persons Income).

Such mistakes can result in incorrect reporting of income, mismatch of information in the return, and non-compliance with the prescribed disclosure requirements.

Before you file your ITR

A gift of house property to a spouse may transfer legal ownership of the property, but it does not necessarily transfer the tax liability on the rental income arising from such property. Under Section 27 read with Section 64(1)(iv) of the Income-Tax Act, 1961, the spouse who transfers the house property without adequate consideration continues to be liable to tax on the rental income.

As the due date for filing ITRs for AY 2026-27 approaches, taxpayers should ensure that the rental income is reported in the correct person's return, the appropriate ITR form is selected, and the requisite disclosure is made in Schedule SPI (Specified Persons Income), wherever applicable. If the return has already been filed without correctly reporting such income, taxpayers should consider filing a revised return.

Proper compliance with these provisions will not only ensure accurate reporting of income but will also help taxpayers avoid unnecessary notices, scrutiny proceedings, interest liability, penalties and other consequences under the Income-Tax Act.

The author, O.P. Yadav, is a former IRS officer with over 36 years of experience in tax administration, education, and training. He is presently associated with Prosperr.io as a Tax Evangelist. The views expressed are personal.