August 23 , 2013
Normally tax is paid on income belonging to our self. But there are situations when we will be required to pay tax for income that relatives or others have earned. This is due to Income Tax law's clubbing of income provisions. We shall delve into the different circumstances where clubbing provisions come into play.
Crux of clubbing income provision
We know that income tax rate depends on income earned in a year. Someone can transfer a part of their income to the spouse, minor child or daughter-in-law so their own tax slab is lowered. Gift made to relatives is not taxable in their hands (relative's hands) so while the income still remains at the individual's disposal he gets away paying lesser tax.
To plug this leak in tax rules clubbing provisions were introduced. Accordingly when assets are transferred to such relatives or to others for the benefit of such relatives, without taking adequate payment then income coming from those assets are taxable to the person who transferred them.
Tax on spouse's income u/s 64 (1)
If you transfer money, real estate property or any other asset to your spouse and the spouse gets income from such asset through interest, dividend, rent etc such income is considered your income. You need to compute tax applicable and pay it. This provision under section 64 (1) iv of the I-T Act does not apply if the spouse makes adequate payment for it or there is an agreement to live apart.
If assets were transferred before marriage then clubbing provision does not set in.
Remuneration, commission or salary that a spouse gets from a company where you or your relatives together have 20% voting rights or any other firm where you or your relatives together are entitled to 20% profits, is to be added to the income of the spouse having higher income, excluding this particular income. This provision under section 64 (1) ii of the I-T Act does not apply if such income is solely owing to professional knowledge and experience of the spouse.
Clubbing minor child's income under section 64 (1A)
Income that your minor child earns is treated as your income. For instance interest on PPF, FD etc of a minor child is taxable in your hands. This is to be clubbed with income of the parent with higher income, excluding this particular income.
If the child is disabled or if the income is owing to a special skill or knowledge of the child or if it is owing to his manual labour then you are exempted from clubbing the income with yours. Besides, according to under section 64 (1A) if parents' marriage is not surviving then such income is to be clubbed with the parent who maintains the child.
Clubbing daughter-in-law's income u/s 64 (1) vi
At times the father-in-law would be charged to pay income tax for what the daughter-in-law earns! If you have transferred money or any other asset to your son's wife without taking adequate payment then income that she gets is treated as yours and taxed in your hands.
Taxation on income from other transfers
When there is income from assets transferred by you to somebody so that such income will benefit your spouse or son's wife then this income is taxable in your hands, under section 64 (1) vii and viii.
If income is generated to someone from an asset you have not transferred to them such income is taxable to you, under section 60. For example if your husband earns rent on a house you own then you are liable to pay tax on the rental income.
When you transfer assets to somebody which you can revoke during their lifetime income from such assets are counted as yours, under section 61 of the Income Tax Act.
Relevant information on clubbing income is put in the table below
Nature of Income
Wife's income from money invested or from other assets which are transferred by husband
Spouses living apart on agreement or adequate payment is made by spouse
Spouse's salary, commission or other remuneration from a firm linked to individual assessee concerned
Income is owing to spouse's technical knowledge and experience
Daughter-in-law's income from assets transferred by individual
Adequate payment is made by son's wife
Income of a minor child
Parent with higher income or in case of separated parents, the one maintaining the child
Income is owing to child's talents, special knowledge or her manual labour; or if the child is disabled
Income from assets transferred by individual to others for benefitting spouse or son's wife
Adequate payment is made by the others concerned
Income from HUF property converted by individual
Adequate payment is made
Any income without transferring assets or from revocable transfer of assets
Assets are not revocable during beneficiary's lifetime ad individual does not gain from such income