Provisions of Clubbing of Income under Income Tax Act 1961
Clubbing of Income - Meaning of Clubbing of Income, Provisions of Clubbing with Examples under Income Tax Act, 1961

People often invest in the name of their family members to save income tax. But in such a situation there is a rule of Clubbing of Income and you cannot save tax in this way. Not only this, if you show your income to others without any proper reason, then the Income Tax Department can take strict action against you.

To avoid such situations, our government made some provisions. These provisions are called Provisions of Clubbing of Income under Income Tax Act 1961.

In this article we will cover clubbing of income meaning, provisions of clubbing of income with example, how to avoid clubbing of income, clubbing of income of spouse, minor child, son’s wife etc.

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Clubbing of Income under Income Tax Act 1961

Normally, the taxpayer has to pay tax on his income, but many times the taxpayer transfers some part of his income or any asset that causes his income to his spouse or minor child to reduce his tax liability.

Provisions of Clubbing of Income under Income Tax Act 1961
Clubbing of Income – Meaning of Clubbing of Income, Provisions of Clubbing of Income with Examples under Income Tax Act, 1961

According to the provisions of Clubbing of Income, in certain circumstances, the income of another person will be included in the total income of the taxpayer and the taxpayer is responsible for paying tax on that income.

Meaning of Clubbing of Income

Clubbing of Income means combining two incomes together. In this, the income of one person is added to the income of another person. That other person can be a relative (husband-wife, son-daughter, and parent), any relative or acquaintance. Tax will be calculated on this clubbed income and will have to pay tax simultaneously.

However, the rule of clubbing does not apply to paying small expenses or income. It applies only in certain situations. The situations in which another person’s income is considered to be included in the assessee’s income are –

  • Giving income of property to your spouse without adequate documents.
  • Income received by your spouse from a company that benefits you.
  • Giving property income to your daughter-in-law without adequate documentation.
  • Minor Child is getting adequate amount of income from somewhere.
  • Transfer of property in the name of Hindu Undivided Family (HUF) of which you are also a member.
  • Revocable transfer of Asset that means transferring the property to someone else temporarily.

If you do not know about all these provisions of clubbing of income, then there may be mistake in calculating your taxable income.

Let’s know all these provisions –

Clubbing of Your Spouse’s Income

Most people use this method to save tax – transferring your own income to spouse. In this case, the rules for clubbing income are as follows-

Income received from Income transferred to your spouse

If you have given some money to your spouse, then that money will belong to him/her. But the tax will be calculated by adding the earnings from that money in your earnings.

For example, if you make a Fixed Deposit (FD) in the name of your wife, then the interest received from FD will be added to your earnings. However, if that interest (earnings) is reinvested, then the interest earned on it will be considered as your wife’s income. And the tax liability will be that of your wife.

Income by the way of Remuneration from a Concern in which you have Substantial Interest

From an institution or company in which you have a substantial interest, your spouse gets a Salary, Commission, Fees or Any Other Form of Remuneration (Cash or Kind) then such income will be included in the total income of yours.

But this provision will not be applicable where the spouse has technical or professional qualifications and gets income on the basis of his qualification, then in such a case, the income will be taxable in the hands of the spouse.

In some circumstances, both you and your spouse have a substantial interest in the institution and both receive remuneration from the same company, then this type of income will be included in the income of the spouse who will have more income (without including the remuneration).

Note – An individual having substantial interest in an institution shall be deemed to have been alone or together with his / her relatives at any time in the previous year.

  • If the institution is a company and the Individual is a beneficial owner of 20% or more voting rights of Equity Shares
  • In any other case, the Individual should have minimum 20% of the profit of the institution.

If you transferred your assets to your spouse without adequate consideration

In such a situation, the income from that property will also be considered by you and not by your spouse. That income will be clubbed into your income and you will be liable to pay income tax (as per the tax slab).

But, if any property has been transferred to your spouse before marriage, then the income from that property will not be clubbed in your income. Similarly, even if divorce occurs in both, the rule of clubbing will not apply to the assets transferred to each other.

Income from Asset Transferred to Son’s Wife

If you transfer any income in the name of your daughter-in-law without adequate consideration, then the provisions of income clubbing also apply there.

For example, you are a shareholder in a company. You have to get a dividend of ₹ 1 lakh from the company. If you have transferred this dividend income to your daughter-in-law, then it will be considered a part of your income. Tax will be calculated after adding it to your income.

Clubbing of Income of Minor Child

If a child below 18 years earns a decent amount, his income is clubbed with the income of his parents. This income will be included in the income of parents whose total income is higher without including minor’s income. However, parents whose income includes Minor’s income will get a maximum exemption of ₹ 1500 per child in section 10 (32).

In some cases, children’s earnings are exempt from clubbing-

  • If the child has earned something due to manual work done by his hand, then it cannot be included in his parents’ income.
  • If the child is disabled, due to which his income is entitled to tax exemption under section 80U. There is no need to club his earnings in the income of parents.
  • If a child has won any prize money due to his talent or knowledge, then he is also exempt from tax.

However, if the child has any income (interest, etc.) from the gift given by parents, then it will be clubbed in the income of his parents.

Note – If the parent has become divorced, in such a situation the income of Minor will be clubbed in the income of the parent who keeps the child with him/her in the previous year.

Provision for Income of Adult Child

The income of adult child (above the age of 18 years) cannot be clubbed in the parent’s income. His income will be calculated independently. If the tax is made on his income, then the responsibility of paying tax also becomes his own. Tax will be calculated as per income tax slab rates.

Income from Asset Transferred to HUF

In Indian society, many businesses run in the name of family instead of a single person. In the Income Tax Act, these are named as HUF (Hindu Undivided Family). Any HUF, like a person, is also responsible for earning income and paying taxes on it.

If you transfer any of your self-generated assets in the name of HUF without adequate consideration, then the provisions of clubbing will apply. The income from that property will be clubbed in your income instead of HUF’s income. You will be responsible for paying taxes on it.

If the transferred assets are received by your spouse through partial or full division of the HUF in the future, then this will be treated as an Indirect Transfer to your spouse and clubbed in the your income.

Revocable Transfer of Asset to Your Acquaintance

You have transferred any asset to your acquaintance. But you have made a provision in it, that you can get that property back in your name in future. In such a manner, this is called “Revocable Transfer of Asset”. Even in such a situation, the entire income from that property will be considered in your name. Not the person whose name you temporarily named that property. If there is a tax liability on that income, then you have to pay it.

Transfer of Income without Transferring of Asset

If you transfer the earning from a property to someone else without transferring the asset, then the entire income from that property will be treated as your own income. It will be clubbed into your income, and then you have to pay income tax on it.

Let’s understand this provision with an example-

Suppose you get rent of ₹20,000 per month from your house property. Now for some reason, you said to your friend to take his income. But, you own the property; that property is in your name. In such a situation, the provision of ‘Clubbing of Income’ will be applicable. The whole transferred income will be added to your earnings for the calculation of tax.

Wrap Up

In this article, we told you that you cannot save tax through transferring your income to your family members due to Provisions of Clubbing of Income. But there are many ways to save tax such as Section 80C investments, gifts received from family members etc. We will try to cover various ways to save tax in our upcoming articles.

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