The complete guide about Clubbing of Income is as follows. Read more to know what is clubbing, Clubbing of Spouse Income, Children Income and more clubbing provisions of Income Tax.
Many of us may invest money for a non-earning spouse by way of mutual funds, or fixed deposits or to set up bank accounts or other income earning assets or other investments made in the name of their children by the parents. Usually, we need to pay income tax on our income, but in certain cases, some incomes are clubbed with your income. On such Clubbed income, you may be liable to pay income tax.
Clubbing Meaning: Clubbing means, the income of another person will be added to taxpayer’s total income and then it is taxed (just like, that income is assessee’s income). The main purpose of clubbing of income under Income Tax Act is to make sure that no tax escapes.
Generally, under Income Tax Act, a person need to pay income tax on his income. A taxpayer cannot transfer his income or asset to some other person. In short, we can say that a person cannot divert his income to someone else and say that it is not his income. If he does so, the clubbing of income should be taken place. That is, the income shown to be earned by any other person is included in the taxpayer’s total income, and the assessee has to pay tax on it.
Clubbing of Income
Clubbing of Income is done in many circumstances. Clubbing attracts in the case of assets transferred to anyone, etc. The details about Clubbing of Income of Spouse, Minor Children, Major Children, Son’s wife, are explained below.
In case of Assets Transferred to Anyone,
|Nature of Transaction||Clubbed in the hands of||Conditions/Exceptions|
|Transfer of Income – no transfer of assets||The person who transfers the income (Transferor).||Irrespective of:
1. Whether such transfer is revocable or not.
2. Whether the transfer is effected after or before the commencement of IT Act.
|Transfer of Asset – which is revocable||The person who transfers the Assets (Transferor).||Clubbing not applicable if:
1. Trust/transfer irrevocable during the lifetime of beneficiaries/transferee or
2. The Transfer made before 01/04/1961 and not revocable for 6 years. Provided the transferor derives no direct or indirect benefit from such income in either case.
Clubbing of Income of Spouse
There are some cases when your spouse’s income gets clubbed with your income. Such cases where you need to pay tax on spouse’s income are as follows.
If your spouse receives a salary from a firm or a company in which you have a substantial interest (you alone or with your relatives hold equity or voting power of a company which is 20% or more), then such salary will be clubbed with your income. Or in the case of a firm in which you are eligible to receive to 20% or more of the profits. If both of you receive an income from such a company or a firm, then it will get taxed in the hands of the person whose taxable income is more or higher.
Exemption – Clubbing of Income of Wife/Husband:
If your spouse receives the salary from his/her own talent or application of professional/technical knowledge and experience, then such salary will not be clubbed and will be taxed in the hands of the person receiving it.
If you transfer an asset to your spouse indirectly or directly without receiving adequate consideration, then the income from this asset will be clubbed with your income. The house property is excluded from clubbing provisions. But as per the Income Tax Act, if you transfer a house property to your wife and don not receive adequate consideration, then you will be considered as the ‘deemed owner’ and the income from the asset will be clubbed with your income.
If you transfer an asset to an AOP (Association of Persons) or a person without adequate consideration for the immediate or deferred benefit, then the income from such an asset will be clubbed with your income.
Clubbing of Income of Minor Child
Minors also can earn income from their own talent, fixed deposits, bank accounts or other investments made in their name by the parents. Under Section 64 (1A), any income that arises or paid to a minor is clubbed with the parents income.
In case, both spouses are earning: If both spouses are earning, the Income of the minor shall be clubbed with the parents income whoever has higher total income. The total income of parent should be considered before adding the minors income.
In case the marriage does not exist: The minors income shall be clubbed with the parent who maintains that child (minor).
In case both the parents are not alive: The minors income is not clubbed with the guardian if both the parents are not alive. In this case, a separate IT (income tax) return is filed for the minor.
There are some deductions that are mentioned below,
- If a child (minor) earns the income of Rs. 1500 or more, then the parent can claim for an exemption of Rs. 1500/- for a minor child whose income is clubbed.
- If a child (minor) earns the income less than Rs. 1500, then the entire amount is deduced.
There are some exceptions, where the minors income is not clubbed. Such cases are mentioned below,
- If a child earns income with own talent or by any manual work or special knowledge and experience, then that income will not be clubbed and the minor shall pay tax on it.
Example: If minor wins price money from a talent show or dance show, then such income will not be clubbed with the parents income. That minor have to pay tax on it.
- If a child suffering from any disability specified under section 80U earns income, then such income will not be clubbed with the parents income.
Section 80U: Under Section 80U a person is considered as a disabled when he/she is suffering from not less than 40% of any of the following,
Low vision, Blindness, Hearing impairment, Leprosy-cured, Locomotor disability, Mental illness, and Mental retardation.
Clubbing of Income of a Major Child (18 years or more)
There will be no clubbing of income in case of a major child. Let us assume that you have given money to your major child who may not be earning and he invested that money. Then any income arises from these investments will be taxed in the hands of a major child and not in your hands.
Clubbing of Income of a Son’s Wife
If you transfer an asset to your son’s wife without adequate consideration, then the income from such an asset will be clubbed with your income (i.e. the individual who transferred the income).