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There are many occasions when you may require to club income of someone else with your income. If you are planning to transfer any of your assets/income to another person as a means of tax planning to avoid the income getting taxed in your hands, hold on. Such transfers could result in attraction of clubbing provisions. under the Indian income tax laws.
Even genuine gifts extended to your kith and kin could have these income tax implications. It will help you immensely if you get some insights on the clubbing provisions under the Indian income tax law. Hence, let us understand these provisions a little more in detail.
As the term suggests, clubbing of income means adding or including the income of another person (mostly family members) to one’s own income. This is allowed under Section 64 of the IT Act. However, certain restrictions pertaining to specified person(s) and specified scenarios are mandated to discourage this practice.
Income of any and every person cannot be clubbed on a random basis while computing total income of an individual and also not all income of specified person can be clubbed. As per Section 64, there are only certain specified income of specified persons which can be clubbed while computing total income of an individual.
|Section||Specified person||Specified scenario||Income to be clubbed|
|Section 60||Any person|| |
Transferring income without transferring asset either by way of an agreement or any other way,
Any income from such asset will be clubbed in the hands of the tranferor
|Section 61||Any person||Transferring asset on the condition that it can be revoked||Any income from such asset will be clubbed in the hands of the transferor|
|Section 64(1A)||Minor child||Any income arising or accruing to your minor child where child includes both step child and adopted child. The clubbing provisions apply even to minor married daughter.||Income will be clubbed in the hands of higher earning parent. |
If marriage of child’s parents does not subsist, income shall be clubbed in the income of that parent who maintains the minor child in the previous year
If minor child’s income is clubbed in the hands of parent, then exemption of Rs. 1,500 is allowed to the parent.
Exceptions to clubbing
Income of a disabled child (disability of the nature specified in section 80U)
Income earned by manual work done by the child or by activity involving application of his skill and talent or specialised knowledge and experience
Income earned by a major child. This would also include income earned from investments made out of money gifted to the adult child. Also, money gifted to an adult child is exempt from gift tax under gifts to ‘relative’.
|Section 64(1)(ii)||Spouse**||If your spouse receives any remuneration irrespective of its nomenclature such as Salary, commission, fees or any other form and by any mode i.e., cash or in kind from any concern in which you have substantial interest*||Income shall be clubbed in the hands of the taxpayer or spouse, whose income is greater (before clubbing). Exception to clubbing: Clubbing is not attracted if spouse possesses technical or professional qualifications in relation to any income arising to the spouse and such income is solely attributable to the application of his/her technical or professional knowledge and experience|
|Section 64(1)(iv)||Spouse**||Direct or indirect transfer of assets to your spouse by you for inadequate consideration||Income from out of such asset is clubbed in the hands of the transferor. Provided the asset is other than the house property. |
Exceptions to clubbing No clubbing of income in following cases:
a. Where asset is received as part of divorce settlement
b. If assets are transferred before marriage
c. No husband and wife relationship subsists on the date of accrual of income
d. Asset is acquired by the spouse out of pin money (i.e. an allowance given to the wife by her husband for her personal and usual household expenses)
|64(1)(vi)||Daughter-in-law||Transfer of assets transferred directly or indirectly to your daughter in-law by you for inadequate consideration||Any income from such assets transferred is clubbed in the hands of the transferor|
|64(1)(vii)||Any person or association of person|| |
Transferring any assets directly or directly for an inadequate consideration to any person or association of persons to benefit your daughter in-law either immediately or on deferred basis
|Income from such assets will be considered as your income and clubbed in your hands|
|64(1)(viii)||Any person or association of person||Transferring any assets directly or directly for an inadequate consideration to any person or association of persons to benefit your spouse either immediately or on deferred basis||Income from such assets will be considered as your income and clubbed in your hands|
|Section 64(2)||Hindu Undivided Family||In case, a member of HUF transfers his individual property to HUF for inadequate consideration or converts such property into HUF property||Income from such converted property shall be clubbed in the hands of individual|
*An individual is said to have the substantial interest in the concern if–
**Income from reinvestment of clubbed income by a spouse is not clubbed in the hands of individual.
Mr P owns a shop which fetches a rent of Rs.12,000 per month. He transfers the rent to his friend Mr Q but retains the ownership of the shop.
In this case, because Mr P has transferred the income without transferring the asset. Hence, as per section 60 of the income tax act, Mr P must include the rental income while computing his total income.
Mr Jay is beneficially holding 21% equity shares of PTK Pvt. Ltd. Mrs Jay is employed as a finance manager in PTK Pvt. Ltd. The monthly salary received from Mrs PTK Pvt. ltd. is Rs. 40,000. Mrs Jay is not having any qualification, experience or knowledge of finance.
In this situation, Mr Jay has a substantial interest in PTK Pvt. Ltd. with 21% shareholding. But Mrs Jay is employed without any qualification and technical knowledge of finance. Hence, salary or payment received by Mrs Jay from PTK Pvt. Ltd. will be clubbed with the income of Mr Jay as per section 64(1)(ii) of the income tax act.
In the above case, if Mrs Jay had the qualification and knowledge for the finance manager post in PTK Pvt. ltd., then income earned by Mrs Jay will not be clubbed in the income of Mr Jay.
Mr Lucky holds gifted Rs. 6,00,000 to his wife. Mrs Lucky has then invested the same amount in the fixed deposit. Mrs lucky receives the interest of 5,000 p.a. from such fixed deposit.
As Mr Lucky has transferred Cash (asset) without adequate consideration and it was converted into another asset by Mrs Lucky. Hence, interest earned of Rs. 5,000 from the converted asset (fixed deposit) will be clubbed in the income of Mr Lucky as per section 64(1)(iv) of the income tax act.
Hence, husband-wife relationship should remain at the time of transfer of asset and also at the time of accrual of income.
For example: If a bond is transferred for Rs. 5 lakh to the spouse or daughter-in-law without adequate consideration and interest of Rs. 20,000 on such bond is clubbed in the hands of the transferor. However, if the spouse or daughter-in-law further earns any income from such interest of Rs. 20,000, no clubbing provisions shall apply on such income.
For example: If Mr K gifts a sum of Rs. 8,000 to Mrs N and Mr. N gifts a sum of Rs. 15,000 to Mrs. K. Say both the gifts are without any consideration. Then the overlapping amount of Rs. 8,000 will be clubbed in the hands of the transferors.