How to understand Clubbing of Income provisions under the Income Tax Act

In general, you are liable to pay tax in respect of your own income. However, sometimes it may not happen. In some specific cases, the income of other persons may be added with your income. Your income tax liability will be calculated on the basis of such total income. It is known as “Clubbing of Income”.

I know what is in your mind.

You can now ask me – “Why the income of others will be added with my income?”

My friend, I already told you it happens in some special cases.

In order to avoid the tax burden, you may shift your income to another person. But, the Income Tax Act has never entertained this kind of activities.

To prevent this kind of activities, the provisions of clubbing of income have been introduced.

Let us discuss it.

# What is Clubbing of Income?

In a normal situation, you are liable to pay taxes on your own income.

However, in some special situation, the income of other persons shall be added to your total income.

Therefore, you are liable to pay tax on both the following income:

• Your own income; and
• The income of Other Persons.

This provisions i.e. the additions of others income with your income is known as “Clubbing of Income”.

# Special Cases of Clubbing of Income

The following are the special cases where the income of other persons will be added with your income:

• Transfer of Income without transfer of assets [u/s 60];
• Revocable transfer of assets [u/s 61];
• Remuneration of Spouse [u/s 64(1)(ii)];
• Income from assets transferred to Spouse [64(1)(iv)];
• Income from assets transferred to Son’s Wife [64(1)(vi)];
• Income from assets transferred to other persons for the benefit of Spouse [64(1)(vii)];
• Income from assets transferred to other persons for the benefit of Son’s Wife [64(1)(viii)];
• The income of Minor’s Child [64 (1A)]; and
• Conversion of self-occupied property into a joint family property and subsequent partition [64(2)].

# Transfer of Income without Transfer of Assets

If any person transfers income without transferring the ownership of the assets such income is taxable in the hands of the transferor.

It is very common that you may generate an income from any of your assets.

And you know very well that if there is any income, you have to pay tax on it.

Now you may transfer that income to any other person without transferring that particular asset.

It does not mean that you can escape from your income tax liability.

In this case, such income is taxable in your hands.

Now take a look at the following example:

Mr. Avishek is the owner of a house property. That property is given on rent. The amount of rent is Rs. 50000 per month. Now, Mr. Avishek transfers this income to his brother Mr. Tanuj without transferring the asset. It looks like Mr. Tanuj will be liable to pay tax for that income. However, the fact is the tax liability will be on Mr. Avishek. He just transfers his income to Mr. Tanuj, without transferring the assets. In that case, the clubbing provisions u/s 60 will be applicable.

 

# Revocable Transfer of an Asset

If there is a revocable transfer of an asset, income from such asset shall be taxable in the hands of the transferor.

Now, you can ask me “What is a revocable transfer?” Let us see:

Revocable Transfer

The meaning of the revocable transfer is as follows:

• A transfer which is revocable i.e. transferor of the asset has the right to reacquire that asset or any income from such asset, either whole or in part, during the lifetime of the transferee;
• A transfer which gives a right to reassume power of the asset or any income from such asset during the lifetime of the transferee.

Therefore, if anybody tries to transfer an asset and reassumes after a certain period of time to avoid tax liability, the result will be big ZERO.

Exception

This provision will not be applicable in the following cases:

• If there is a transfer by way of TRUST which is not revocable during the lifetime of the transferee;
• Any transfer which is not revocable during the lifetime of the transferee.

# Remuneration received by the Spouse

An individual is chargeable to tax in respect of any remuneration received by the spouse from an entity in which the individual has a substantial interest.

For example Mr. X has a substantial interest in XZD Ltd. Now Mrs. X is an employee of that concern. So, the salary received by Mrs. X is chargeable to tax in the hands of Mr. X.

Substantial Interest

An individual is deemed to have substantial interest, if he (either individually or along with relatives) beneficially holds 20% or more of equity shares (in case of a Company) or is entitled to 20% of profit (in case of the entity other than a Company) at any time during the previous year.

When the clubbing provision will not be applicable?

In the following cases, the remuneration will be clubbed in the hands of the spouse and not in the hands of the individual:

• If the spouse possesses any technical or professional qualification; and
• The remuneration is solely attributable to the application of technical or professional knowledge of the spouse.

For example:

Mr. X has a substantial interest in the company XYZ Ltd. Mrs. X is an employee of that company. Again, she is a Chartered Accountant and she receives remuneration on the basis of her professional expertise. In this case, no clubbing provision will be applicable. The total amount of the remuneration will be taxable in the hands of Mrs. X.

When both the husband and wife have a substantial interest in the concern

It may happen that both the husband and wife have a substantial interest in the concern and both are employed by such concern.

In such a case, the remuneration will be included in the total income of the husband or the wife whose total income excluding such remuneration is greater.

For example–

Mr. X and Mrs. X both have a substantial interest in concern and both are employed by such concern.

Salary of Mr. X is Rs. 150000 per annum and the salary of Mrs. X is Rs. 180000 per annum. Mr. X has a business from which he earns Rs. 250000 per annum. Mrs. X has no other income.

In this situation, the income of Mr. X other than such salary income is higher than that of Mrs. X.

Therefore, the salary income of Mrs. X will be clubbed in the hands of Mr. X.

# Income from Assets transferred to Spouse.

Don’t look at me like this.

I know what you are thinking now. Let me explain.

Any asset transferred to the spouse is a gift.

And you know any gift to spouse is not taxable. No matter, that gift in terms of money or in a kind.

But what about clubbing provision?

Yes, the clubbing provision may arise in this case.

See the following points.

Important Conditions

Following conditions are very important to understand this provision:

• The assessee is an individual.
• He/she has transferred an asset to his/her Spouse.
• The asset must be other than a house property.
• The transfer must be without adequate consideration.
• The transfer is not in connection with an agreement to live apart.

If the above-mentioned conditions are satisfied then the income from such asset shall be deemed to be the income of the transferor.

Importance of this provision

It is really an interesting provision related to income tax.

Let, you have transferred an asset/money to your spouse. It is a gift.

As you know, any gift from relatives is not taxable.

So, it is not taxable in the hands of your spouse.

But, the provision of clubbing of income will be applicable.

Any income from such gift shall be chargeable to tax and you are liable for such taxation.

Practical example

Example 1

Suppose you have gifted Rs. 10 lakh to your wife. It is not taxable in your wife’s hand. You are also not liable to pay tax.

Now, your wife invests it as a fixed deposit and earns Rs. 6750 as an interest income.

The interest income of Rs. 6750 will be clubbed with your income.

Example 2

You have gifted Rs. 30 lakh to your wife. In turn, your wife invests it in a business and earns Rs. 300000 as a profit.

The amount of Rs. 3 lakh will be clubbed with your income.

Again, your wife invests that Rs. 3 lakh as FD and earns Rs. 19000 as an interest income.

This Rs. 19000 will not be clubbed with your income. It will be treated as your wife’s income.

Example 3

In the above example, your wife starts a business with Rs. 30 lakh. She also invests Rs. 10 lakh from own sources. She earns Rs 4 lakh as profit.

In this case, the entire amount of Rs. 4 lakh will not be clubbed with your income.

This is because the total invested amount was Rs. 40 lakh. Out of which your wife’s contribution was Rs. 10 lakh.

So, the amount of clubbing portion is Rs. 4 Lakh x Rs. 30 lakh

Rs. 40 Lakh

Therefore the amount of clubbing portion is Rs. 3 Lakh.

# Income from assets transferred to Son’s Wife

In order to understand this provision, the following points are very important:

• The assessee is an individual.
• He/she transfers an asset to his/her son’s wife.
• Such transfer must be without adequate consideration.
• Such transfer must be taken place after 31/05/1973.
• The asset means any asset.

If the above conditions are satisfied, any income from such assets shall be clubbed with the income of the transferor.

Practical Example

You have gifted a house property to your son’s wife. Now, your son’s wife gives on rent that house property and earns Rs. 15000 per month as rent.

This rental income will be clubbed with your income.

Important points for tax purpose

If you have gifted any assets to your son’s wife before marriage, there will be no clubbing of income.

But remember, before marriage, relation with your daughter-in-law did not exist. So, in that case, such gift would be taxable.

# Income from assets transferred to a person for the benefit of Spouse.

To understand this, the following points are very important

• The assessee must be an individual.
• He/she has transferred any assets (directly or indirectly).
• Such transfer must be to a person or an association of persons.
• Such transfer must take place without adequate consideration.
• The transfer must be for the benefit (either immediate or deferred) of his/her spouse.

If the above conditioned are satisfied, any income from such asset shall be clubbed with the hands of the transferor to the extent of such benefit.

# Income from assets transferred to a person for the benefit of Son’s Wife.

To understand this, the following points are very important

• The assessee must be an individual.
• He/she has transferred any assets (directly or indirectly).
• Such transfer must be to a person or an association of persons.
• Such transfer must take place without adequate consideration.
• The transfer must be for the benefit (either immediate or deferred) of his/her daughter-in-law.

If the above conditioned are satisfied, any income from such asset shall be clubbed with the hands of the transferor to the extent of such benefit.

# Income of Minor Child

You can ask me this.

I know what is going on in your mind.

Yes, any income of minor child shall be clubbed with the income of his/her parents.

Please remember, the income of minor child will be clubbed with the income of that parent whose income (without considering the income of minor child) is higher.

However, if the marriage of the parents does not exist, the minor’s income will be clubbed with that parent’s income who maintains the minor in the relevant previous year.

Please remember, if any income of your minor child will be clubbed with your income, you are eligible to get exemption of Rs. 1500 u/s 10(32).

Exceptions to this rule

In the following cases, the income of minor child will not be clubbed with the income of his/her parents:

• Such minor have earned that income by manual work.
• Such income was earned from any activity involving his/her talent or specialized knowledge and expertise.
• In case the minor is suffering from any disability of the nature specified in section 80U.

Practical Example

Example 1

Suppose Mr. X has two children, A, and B. Both are minor. B is suffering from disability of the nature specified in section 80U.

Mr. X has gifted them Rs. 300000 each as FD.

The annual interest income from such FD is 25000 each.

Interest income of A will be clubbed with the income of Mr. X. But the interest income of B will not be clubbed because he is suffering from a disability specified in section 80U.

Example 2

Suppose ‘A’ earned Rs. 35000 from chess competition where he used his skill and knowledge.

This income will not be clubbed with the income of Mr. X.

It will be taxed in the hands of A.

Example 3

Mr. X has one minor child – A.

A has earned Rs. 25000 as bank interest.

This Rs. 25000 will be clubbed with the income of Mr. X.

Now, Mr. X is eligible for exemption of Rs. 1500 as per section 10(32).

# Conversion of self-occupied property into the joint family property and subsequent partition

If a member of a HUF transfers his self-occupied property to the HUF (without adequate consideration), then any income from such property shall be clubbed with the hands of the transferor.

Further, in case of partition of the HUF, such asset may be distributed amongst the member of the HUF. Any income derived from the property as is received by the spouse of the transferor will be taxable in his hands.

Practical Example

Example 1

Mr. X has transferred his self-occupied property of Rs. 1500000 to the HUF.

Income generated from such property is Rs. 50000.

This will be clubbed with the hands of Mr. X.

Example 2

In case of partition of the HUF, such asset is divided amongst the member.

Mrs. X receives Rs. 300000 as the share of such property.

She invests it as FD and earns Rs. 25000 as interest.

This Rs. 25000 will be clubbed with the hands of Mr. X.

# TDS on Clubbing of Income

Mr. X gifts Rs. 1500000 to his wife Mrs. X.

Mrs. X invests that amount as a bank FD and earns Rs. 90000 as interest income.

As per rule, this Rs. 90000 will be clubbed with the income of Mr. X.

But the bank will deduct TDS @10% from Mrs. X.

In this case, Mrs. X will furnish a declaration under Rule 37BA to the bank.

After that, the TDS will be deducted in the name of Mr. X.

You may ask me “what will happen if the IT return has been filed by both of them?”

A revised return must be filed and thereafter Mr. X should disclose his clubbed income.

#Tax planning on Clubbing of Income

Few tips for tax planning (Strictly not for tax avoidance and tax evasion)

• Suppose you gift your spouse Rs. 500000. If your spouse invests it in mutual funds then clubbing provision may not be attracted. This is because in the case of long term capital gain, up to Rs. 100000 is exempted. So, to that extent of capital gain, nothing will be clubbed.
• You can invest in PPF in the name of your spouse. PPF is totally exempted from tax. So there will be no clubbing of income.
• Instead of a gift, you can give a loan to your spouse. In that case, any income from such amount will be the income of your spouse. Remember, there is a restriction on the amount of cash loan. It is very much advisable for disbursement of the loan through the bank account. Further, proof of documents is required.
• If you gift to your major son or daughter, there will be no clubbing of income.
• Suppose you gift your spouse Rs. 300000. He/she invests it in business. Now, there may be a loss of Rs. 50000 from such business. It is deducted from your total income. In the case of clubbing provision, you can claim loss also.

(You should take advice from your tax consultant before making any decisions.)

 

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