Clubbing of Income

In the case of Individuals, income tax is levied on a slab system. As such when income increases there is an increase in income tax also. To minimize tax burden, some individuals divert some portion of their income to other persons. In order to stop all this, clubbing provisions have been incorporated in the Income Tax Act. The Indian tax law has special provisions related to clubbing of income earned by the spouse, minor child or daughter-in-law under specified conditions.

1.       Transfer of income without transfer of Assets

     Where there is transfer of Income without transfer of Assets then Income from such assets shall be clubbed with the income of Transferor.

 

2.     Revocable Transfer of Assets

    Transfer shall be deemed to be revocable if it contains a provision for re-transfer or gives the transferor a right to re-assume power during the life time of the transferee.

    In case of revocable transfer of assets, Income shall be clubbed with the Income of Transferor.

 

3.    Irrevocable Transfer of Assets

     Income shall be taxable in the hands of transfree provided transferor derives no benefit from such income or assets.

     

      Exceptions:

            ·         Income shall be clubbed in the income of transferor as and when the power to revoke the transfer arises. Actual revocation is not relevant.

 

4.   Income of individual to include income of spouse from a concern in which individual has substantial interest

    The remuneration received by the spouse from a concern in which the individual has a substantial interest is clubbed with the income of the lndividual. However, if the remuneration is received by the spouse on application of technical or professional knowledge or experience, the clubbing of income will not take place.

    Substantial interest is defined as a situation wherein a person is the beneficial owner of at least 20% or more Equity Voting Power (in case of Company) or is entitled to 20% or more of the profits (in any other case).

 

5.    Income of individual to include income of spouse

    The income of the spouse arising from an asset (except House property) transferred by the individual for inadequate consideration is clubbed with the income of the individual. However, such clubbing will not be done if the asset is transferred in connection with an agreement to live apart. The relationship must exist at the time of transfer of asset and at the time when income accrues. Income shall also be clubbed if an asset is transferred by an individual to AOP for inadequate consideration for the immediate benefit of his/her spouse.

 

6.    Income of individual to include income of son’s wife

    The income of son’s wife arising from an asset transferred by the individual for inadequate consideration is clubbed with the income of the individual. The relationship must exist at the time of transfer of asset and at the time when income accrues. Income shall also be clubbed if an asset is transferred by an individual to AOP for inadequate consideration for the immediate benefit of his son’s wife.

    Note: If assets transferred by an individual to his spouse/son’s wife (case 5&6) are invested by the transferee in any business then proportionate income arising from such business is to be clubbed in the income of individual.

 

7.    Income of Minor Child

     Any income that arises to a minor child including minor married daughter will be clubbed with the income of the parent whose total income is higher than the other parent subject to a deduction of Rs. 1500 per child. If the marriage of the parents does not subsist, it will be clubbed with the income of the parent who maintains the child. However, income earned by the minor child suffering from a specified disability, or on account of manual work, or involving application of his skills or talent, will not be clubbed. If none of the parent is alive, minor shall file the return through legal guardian and there shall be no clubbing in such case.

 

8.    Conversion into HUF Property

     Where separate property of individual is converted by the individual into property belonging to the family for inadequate consideration then income derived from the converted property shall be deemed to be the income of the individual till the time partition takes place.

    Where the property has been the subject matter of a partition, the income earned by spouse of individual from such converted property shall be clubbed with the income of the individual.

 

This Article has been Shared by Student of ICAI Palak Aggarwal. She can be reached at aggarwal.palak2809@gmail.com