Income of individual to include income of spouse, minor child, etc.(Section 64)
Updated: Oct 3, 2022
#IncometaxAct1961, #Section64, #Income, #spouse, #minor, #rules, #acts, #sections, #law
Introduction
In India we have a progressive system of taxation, which means as your income increases, you have to pay more taxes as per the applicable income tax slab. To avoid paying high taxes, many people transfer their assets or arrange sources of income in the name of their wives, children, parents, and relatives to bring down their income. To curb such tax avoidance practices, the income tax introduced the “clubbing of income “ provision under sections 60 to section 64 of the income tax act.
What is Clubbing of Income in Income Tax Act?
When the income of another person is included in your income and taxed in your hands, then such a situation is called Clubbing of Income. The income clubbed in your income is called deemed income. The provisions of clubbing of income apply only to individuals and no other type of assessee like firm/HUF/Company etc.
Let’s say you have a total income of Rs 3,00,000. It comprises salary income worth Rs 2,00,000 & rental income of Rs 1,00,000. To fall below the basic exemption limit, you transfer rental income without transferring the house owners in your wife’s name. Now, while calculating tax, your taxable income shall be taken at Rs 3,00,000, not Rs 2,00,000. This is because of the income tax provisions on Clubbing of Income.
Clubbing of Income of Spouse [Section 64(1)(ii), 64(1)(iv), 64(1)(vii)]
In common parlance, the easiest way to save tax is practiced by transferring income in the name of your spouse. There are very special provisions to regulate such transfers. All the different scenarios are discussed below.
Your spouse works in a concern/entity in which you have a substantial interest.
When you and your spouse receive remuneration from concern and both have a substantial interest in that concern: In such case, remuneration of both will be clubbed in hands of that spouse whose income excluding such remuneration is higher. However, as per the common view, if both spouses are earning remuneration due to their professional competence then provisions of clubbing shall not apply. Note: Substantial interest means when you are entitled to 20% or more share of profits (in case of a firm) or not less than 20% voting power (in case of a company) at any time during the year.
If you have transferred an asset to your wife without adequate consideration: It is a very common practice, where a husband transfers an income-earning asset in his wife’s name to save tax. These provisions have been introduced to target such tax avoidance practices. In this case, income from such assets shall be taxable in your hands. This provision of clubbing of income will not apply in the case. A . the asset is transferred for adequate consideration or B. as a condition of divorce or C. it was transferred before marriage.
The nature of the transferred gift is changed by the transferee: Sometimes it is seen that a gift transferred that was not taxable previously is further invested in a source such that it starts yielding income. In all such instances where the nature of the asset is changed by the transferee spouse provisions of section 64(1)(iv) are attracted and clubbing of income takes place. Read the Taxability of gifts Example.: Mr. Sharma gifted his wife Rs 5,00,000. The wife invests this amount in an FD and starts earning interest on the same. Will this interest income be taxable in the hands of Mr. Sharma? Since a gift of Rs 5,00,000 has been made to a relative it will not be taxable. But the interest earned on FD will be taxable in the hands of Mr. Sharma as per the provisions of section 64(1)(iv). The clubbing provisions will be attracted as the form of the asset transferred has been changed by the transferee i.e. Mrs. Sharma.
Any transfer of asset made to a third person or AOP: Such transfer must have been done without consideration or with inadequate consideration to ultimately benefit your spouse now or at some later time. Such routing of assets to defer the benefit from assets to your spouse will also be covered under the ambit of clubbing provisions.
Clubbing of Income in case of Son’s Wife [Section 64(1)(vi),64(1)(viii)] Clubbing of income provisions also applies in case of any transfer of income made to your daughter-in-law. The situation is discussed below. The asset has been transferred to your daughter-in-law without any proper consideration: In this case, any income generated from that asset will become taxable in your hands.
E.g.. you have 10,000 10% Debentures of Rs 100 each which you have transferred to your daughter-in-law without any consideration. Now interest income of Rs 1,00,000 will be included and taxable in your hands.
The asset has been transferred to some other person or AOP to ultimately defer its benefits to your daughter-in-law : In such a case when these transactions are carried out without any proper consideration just to route the income tax liability to other hands, it is closely monitored by the Income Tax Department and is added back to your income as per the clubbing of income provisions.
Clubbing of Income of Minor Child [Less than 18 years] [Section 64(1A)] Any income earned by a minor child is clubbed in the hands of either of his/her parents, whose income (excluding minor child income) is greater. For example, for a Fixed deposit taken in the name of a minor child, the interest earned Will be clubbed with the income of the highest-earning parent. However, as per Income Tax provisions, there are certain situations in which the clubbing of income provisions will not apply. These are:
When a minor child is suffering from any disability as mentioned in Sec 80U, or
When income is earned by the minor child through manual work, or
Income earned by the minor child through his skill, talent, knowledge, etc.E.g.. the minor child wins money on TV shows like Indian Idol Junior winner, Voice India Kids, etc.
Moreover, an exemption of Rs 1500 is provided u/s 10 (32) on income earned by each minor child to the parent under which the minor’s income is being clubbed. Do not forget to claim this exemption folks!
Clubbing of Income of Major Child Many people ask, what about income earned by his/her major child? There is no need for a special provision in such a case. A major child is governed by the principles applicable to an individual up to 60 years of age. So, if your major child is earning income above Rs 2,50,000 (before any deduction), Then he is liable himself to file his income tax return. No clubbing of income provisions shall apply. There might arise a situation where the child was a minor but attained the status of major in the same financial year. In such a case income would be clubbed until such child was minor and not for the remaining part of the year.
Clubbing of Income & HUF [Section 64(2)] The existence of the Hindu Undivided Family has been for ages. Income Tax provisions also recognize HUF as an assessee. In simple terms, a HUF is also liable to file an income tax return. To read about HUF as an assessee, Hence, it’s obvious that clubbing of income provision is also attracted in the case of HUF. If any of your assets have been transferred to the HUF without any adequate consideration: In such case, all income from such asset shall be taxed in your hands. In case of a split of HUF in the future, the distributed property in your spouse's hands will be clubbed with your income.
E.g. you have a house from which a rental income of Rs 5,00,000 p.a. is earned by you. When you transfer this house to HUF without consideration or inadequate consideration then the income of Rs 5,00,000 will be taxed in your hands only.