Clubbing of Income under the Income Tax Act

Clubbing of income defines as Income of other persons includes in assessee’s total income, for example, Income of husband which is shown to be the income of his child is clubbed in the income of Father and is taxable in the hands of the Father. Under the IT Act, a person has to pay taxes on his income. A person cannot shift his income or property which is one of the source of his income to some other person or in other words a person cannot transfer his income to any other person and says that it is not his income. If he does so the income shown to be earned by any other person is included in the assessee’s total income and the assessee has to pay tax on it.

Circumstances that may attract this 'Clubbing' of income –

In the case of Property Transfer

Transfer of Income but assets not transferred: When you retain the possession of an asset but decide to transfer its income by doing an agreement or any other way, the Act will still consider that income as your income and it will be included in your total income for taxation purposes.

Transfer of asset (which is revocable): When you transfer the possession of an asset and make such transfer revocable, income from such an asset will continue to be included in your income.

Clubbing of Spouse Income

These are some situations when the income of spouse will get clubbed to your income and you'll have to pay tax on it-

(1) If in case spouse receives a salary from a company or a firm in which you have a substantial interest (ownership right 20%), then such salary will be clubbed with your income for tax purposes. Substantial Interest is interest by which an assessee alone or with his relatives (relative includes - husband, wife, brother, sister or your inherited ascendant or descendant) possess equity or voting power of a company which is more than 20%. Also, if both you and your spouse receive income from such an entity, it will get taxed in the hands of the person whose taxable income is higher. There is one exception for the same case - if your spouse receiving the salary due to his/her application of technical or professional skills & experience then such salary will be taxable in the hands of the person receiving the amount and not clubbed.

(2) You transfer an asset/property to your spouse against inadequate consideration, directly or indirectly (does not include where the asset is transferred as part of a divorce settlement) - income from this asset/property will be clubbed with your income. For example – where the wife to reduce his tax liability transfers an asset worth Rs 5,00,000 to her husband for Rs 3,75,000 .3/4th of the income from this asset will be taxed in the hands of the wife. If he receives no consideration, in that case the entire income from this asset will be clubbed in the hand of wife. Although the clubbing provisions do not include house property - in case you transfer a house property to your wife against inadequate consideration, as per the Act, you will still be considered the 'deemed owner' and the income generates from the asset will be clubbed with your income.

(3) You transfer an asset to a person or an association of persons, against inadequate consideration, directly or indirectly, so that the benefit that accrues to your spouse either now or on a deferred basis, income from that asset will be clubbed in your income.

(4) Let’s take a situation where you give money to your spouse (who is not working) and that money is invested by the spouse and a certain income is generated (from such money that you have given to your spouse). The income generated from such investment done by her/his can be clubbed to your income. However, if your spouse reinvests the amount of income and earns further income then such income may not be clubbed with your taxable income.

Clubbing of Minor Child’s Income (less than 18 years old)

(1) A few families make fixed deposits in the name of a minor child. Income of a minor is included in the hands of the parent whose total income is higher. If the parents are separated/ divorced it is clubbed with the person who is maintaining the child. There is one exception to this rule - if the minor has attain an income because of his own manual work, or used his skills or specialized knowledge & expertise OR in case of a minor who is handicapped (based on definition of disability in Section 80U) and earns an income, such income will not be clubbed.

(2) When your minor child's income is clubbed to your income – you can avail exemption up to Rs 1500 for each such minor child. Which means if clubbed income is more than Rs 1500, Rs 1500 is the maximum exemption, however if clubbed income is say Rs 1000 (less than Rs 1500) exemption can be taken to such lesser amount, Rs 1000 in this case.

Clubbing of Income of Major Child (18 years old or more)

You may be transferring some money to your major child (who may not be earning), in this case, if the major child invests that money - any income from these investments will not be taxable in your hands but will be taxable in the hands of the major child.

Clubbing of Income of Wife of Son

You transfer an asset to your son's wife directly or indirectly against inadequate consideration – income generated from that asset will attract clubbing provision. Or you transfer an asset to a person or AOP, for the immediate or deferred benefit of your wife of son, against inadequate consideration, directly or indirectly - income from the asset will attract the clubbing provision.

About the other Gifts

On the other hand clubbing provisions that club income that you may be trying to move within your family and there are some provisions that allow certain gifts. Even though the Gift Tax Act was revoked effective 1st October 1998, certain provisions in the Income Tax Act can be taxed the money or assets you gifted.

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