Karnataka High Court Examines Sex Discrimination in Spousal Gift Tax Exemption for Same-Sex Couples

The Karnataka High Court has heard arguments in a writ petition that challenges whether the exclusion of same-sex couples from spousal gift tax exemptions constitutes sex discrimination under the Indian Constitution. The case, heard before Justice B M Shyam Prasad, centres on the denial of tax relief to a same-sex couple when one partner gifted a 22-karat gold bracelet to the other, a transaction that would receive full exemption if the couple were heterosexual and married.

The dispute arises from the fifth proviso to Section 56(2)(x) of the Income Tax Act, 1961, which exempts gifts received from specified relatives, including a spouse, from being taxed as income. The law currently defines spouse in a manner that excludes same-sex partners, even where such couples may be in legally recognised relationships or civil unions in certain contexts. The petitioners argue that this exclusion violates Articles 14 and 15 of the Constitution of India, which guarantee equality before the law and prohibit discrimination on grounds including sex.

Counsel appearing for the petitioners contended that the Union Government's defence of the provision is misconceived. The argument presented to the bench was that the test of intelligible differentia under Article 14 cannot justify exclusion based on the prohibited ground of sex under Article 15. In other words, even if the government could theoretically classify people for tax purposes, sex is a ground on which the Constitution forbids such classification. The petitioners framed the issue as one of indirect discrimination, arguing that while the statute does not explicitly mention sex, its practical effect is to deny benefits based on the sex or gender identity of the couple.

The case raises a fundamental question about how tax law must adapt to recognise same-sex relationships. India's legal system has undergone significant shifts in recent years regarding LGBTQ+ rights. The Supreme Court decriminalised homosexuality in 2018 by reading down Section 377 of the Indian Penal Code. However, many statutes drafted before that judgment, or even after it, continue to define terms like spouse, husband, wife, and family in ways that reflect historical heteronormative assumptions. The Income Tax Act, enacted in 1961, predates modern constitutional recognition of same-sex relationships by decades.

The practical impact of the current law is concrete and measurable. A heterosexual married couple can gift substantial assets to one another without any income tax liability on the recipient. The same-sex couple in this case faced a tax demand on the value of the gold bracelet because it did not fall within the spousal exemption. This creates a direct financial burden that heterosexual couples do not bear, and the petitioners argue this burden flows from a classification based on sex.

The argument about intelligible differentia is a technical but crucial one. Under Article 14, the state may classify people for different treatment, provided the classification has a rational basis and bears a reasonable relationship to the object of the statute. However, Article 15 carves out certain grounds as impermissible bases for classification. Sex is one such ground. The petitioners' argument is that even if the government could theoretically defend tax exemptions for gifts between spouses as a rational policy, it cannot do so in a way that excludes same-sex spouses based on sex.

The government's position, as the petitioners characterised it, appears to rest on the argument that the exemption is limited to those within a defined class—married couples—and that same-sex couples are not within that class. However, this argument may face scrutiny under modern constitutional jurisprudence. If the definition of spouse itself is sex-based or sex-discriminatory, then the exemption built on that definition would inherit that constitutional infirmity.

This is not the first time Indian courts have grappled with how gender-neutral or sex-based language in statutes must be interpreted in light of constitutional values. Courts have previously expanded the meaning of spouse, widow, and other family-related terms to include same-sex partners in contexts ranging from succession law to employee benefits. The question before Justice Shyam Prasad is whether tax law must follow the same trajectory.

The Income Tax Act contains numerous provisions that reference spouses and family relationships. If the court rules that the spousal gift exemption violates Articles 14 and 15, the implications could extend beyond this single provision. Other sections granting tax benefits or imposing obligations based on marital status might face similar challenges. This could include provisions related to filing status, deductions, and treatment of jointly held assets.

The petitioners' case also reflects a broader pattern in Indian law where statutes have not kept pace with constitutional recognition of same-sex relationships. The Hindu Succession Act, the Indian Succession Act, and various other laws define family and inheritance rights in ways that traditionally excluded same-sex partners. While courts have sometimes read these provisions expansively, the most stable solution would be legislative amendment to make such laws explicitly gender-neutral.

The tax exemption for spousal gifts serves a policy purpose: it recognises the intimate economic unit of marriage and avoids imposing income tax on transfers within that unit. The petitioners argue that this policy rationale applies equally to same-sex married couples or those in recognised same-sex relationships. There is no reason rooted in tax administration or fiscal policy that would justify limiting the exemption to heterosexual couples. The only basis for the distinction is sex or gender identity, which is precisely what Article 15 forbids.

Justice Shyam Prasad has not yet announced a date for the next hearing or for judgment. The bench will need to consider whether the current definition of spouse in Section 56(2)(x) can be read to include same-sex partners, or whether the provision itself must be struck down as discriminatory. The court may also consider whether a reading-in approach—where courts interpret statutes to align with constitutional values—is appropriate here, or whether the matter requires legislative intervention.

The case arrives at a moment when Indian courts are increasingly willing to recognise the rights and dignity of same-sex couples. The 2018 judgment on Section 377 opened a constitutional door, but many statutory provisions remain to be aligned with that shift. The Karnataka High Court's examination of the spousal gift tax exemption will test whether tax law, like other areas of civil law, must now be read through a lens that does not discriminate based on sex or sexual orientation.