If he husband lives in California and the Wife lives in Indiana and they have their separate incomes, why does California include Indiana Income where Indiana does not?

Just to add to the Monkey's comments, the fact that you are having this problem with the software tells me you're filing MFJ for federal and MFS for state.  

Before your question can be solved, we first need to determine the domicile of both the resident husband and nonresident wife.  If both spouses are domicile of CA (or another community property state) but the wife is treated as a nonresident based on the safe harbor, it would be correct for 50% of the nonresident wife's income to be allocated to the resident husband.  The resident husband would report 50% of income from self + 50% of income from wife.  The nonresident wife would report 50% of income from husband on CA-540NR.  This does not take into account workdays within and without CA.

For IN tax purposes, you will need to research a bit more whether and how IN tax law treats income of resident taxpayers who file MFS but whose domicile is in a community property state.

CA generally requires the same filing status to be used for both federal and state returns unless one spouse is a full year nonresident AND that spouse does not have any CA source income.  Where the nonresident wife is allocated CA-source income from the resident husband due to community property law, the couple will NOT meet the exception for filing MFS for CA when MFJ is used for federal.

If the couple was divorced or separated with no intention to reconcile, community property law may cease to apply with the divorce or separation.