Clubbing of Income under Income Tax

What is Clubbing of Income

Clubbing of income means that Income of other person is included in total income of assessee’s. Under this provision of Income Tax Act, a person who is not officially earning the income has to pay taxes on his income. As per Section 64, there are only certain specified incomes of specified persons which can be clubbed while computing total income of an individual.

Circumstances of clubbing

Spouse’s Income

Salary of spouse (section 64(1)(ii)):

Applicability: If your spouse is receiving salary, commission or fess from the entity in which you have substantially interest then their income will be clubbed with your income. And if both receives the payment from the entity then the person earning higher income have to get clubbed the income of its spouse.

Substantial interest means you or with your relatives (husband, wife, brother, sister or your lineal ascendant or descendant) hold equity or voting power or profit sharing of that entity which is more or equal to 20%.

Exception: If your spouse receives the salary due to his/her application of technical or professional knowledge & experience then such salary will be taxed in the hands of the person receiving it and will not be clubbed.

Transfer of Assets (section 64(1)(iv):

Applicability: If any person transfers his/her assets in the name of your spouse without adequate consideration the income from such asset will be clubbed to the income of transferee. It means transferor will still be treated as deemed owner of the assets.

Transfer of money: If a person transfers or gives any money to his/her spouse and the spouse invests the money than the income from such investment will be clubbed and taxable in the hands of transferor.

Capital Gain: If any property is received by the spouse without any consideration, and the spouse sells the property at profit, then capital gain arising on such transfer will be taxed in the hands of assesse/transferor.

Exceptions: The exceptions to the transfer of assets are as follows:

1. In case the assets are transferred before the marriage
2. In case the assets are transferred with adequate consideration.
3. In case of any agreement which is for living apart
4. In case there is no relation of husband and wife on the date of accrual of income

Income of Minor Child {Section 64(1A)}

Applicability:

Income of minor (under age of 18) will be clubbed in the income of its parent earning the higher income. If the parents get separated the income will clubbed with the person who is maintaining (having the custody) the child.

If minor’s income is clubbed to the parents’ income he will be entitled for the exemption of up to Rs 1500 for each such minor child. Income of a trust created for the benefit of minor child will also be clubbed in the hands of parent as above.

Exception: The exception towards clubbing of income in case of minor are as follows:

1. In case the minor child is suffering from disability U/s 80U
2. In case the child carries out the manual work
3. In case the child carries out any activity which involves talent or specialized knowledge.

Income of Son’s Wife {Section 64(1)(vi)}

In case if any person transfers an asset to his son’s wife directly or indirectly without receiving an adequate consideration than income from such asset will be clubbed to the individual transferring such asset.

Income of Hindu Undivided Family from property converted by individual {Section 64(2)}

In case, a member of HUF transfers its individual property to HUF without adequate consideration or converts such property into HUF property. Income from such converted property will be clubbed in the hands of individual

Transfer of Income without transfer of assets (Section 60)

In case any person transfers the income from any asset and not the asset by any agreement or any other way then under the Act it will still be considered as your income and it will be added to your total income for taxation purposes.

Transfer of revocable Asset (Section 61)

When a person transfers the ownership of any asset and make such transfer revocable at any time, the income from such an asset will continue to be added to your income.

Exception from clubbing

Income of Major Child

In case parents are giving some money to its major child (who may not be earning), and if major child invests that money under some business income generating from such investments will not be taxable in the hands of the parent but will be taxed in the hands of the major child. So therefore, there will be no clubbing of income in case of a major child.

Frequently Asked Question

Que. What is revocable asset?

Ans. Under Revocable transfer the transferor directly or indirectly exercises control/right over the asset transferred or over the income from the asset

Que. I transfer my asset to my married daughter what is its tax applicability?

Ans. Income from asset transfer to the married daughter will not be clubbed with the income of her parents.

Que. I have a house with the name of my wife she is not earning any other income, is income from such house will be taxable in my hands?

Ans. Clubbing provision of spouse income will be attracting in case you have transferred the asset to the spouse without adequate consideration. But in case the house property is in the name of your spouse with the beginning that means you haven’t transferred the property to her then the income will not be taxable in your hands.