By Chetan Chandak
Clubbing of income simply means that income of another person is included in your total income or, simply speaking, you are responsible for paying taxes on the income earned in the name of another person. When you make investments on behalf of your minor child, spouse, or daughter-in-law, then the Income Tax law clubs income from these investments with your total income and you ultimately get taxed on the overall income. Investments such as property, fixed deposits, shares, immovable property, mutual funds, post office savings, etc., come under clubbing provisions. Tax implications resulting from clubbing of income differs in each case.
Often parents invest in various tax-saving instruments such as mutual funds (MFs), Public Provident Fund (PPF), bank deposits, etc. in the name of their minor child. If you open a fixed deposit in the name of your minor child, then income arising from the fixed deposit will be clubbed with the income of the higher earning parent and taxes will be levied on the clubbed income. However, if parents are divorced, then the person raising the child will be taxed. There is an exception in the case of disabled children and minors (earning income on account of their talent, manual work, etc.). So, if your income includes income of your minor child, then you can claim tax exemption u/s 10(32) up to Rs 1,500 per annum for each child. Further income out of property transferred for no consideration to a minor married daughter shall not be clubbed in the parents’ hands.
Income once included in the total income of either of parents, it shall continue to be included in the hands of the same parent in the subsequent year unless AO is satisfied that it is necessary to do so (after giving that parent opportunity of being heard).
Tax implication is different in case of a major child. Income arising from investments either made in the name of a major child or made by a major child will be taxed in the child’s hands only.
Income derived from any investments made by you in the name of your spouse will be clubbed with your income and then it will be taxed as your income. Now the catch is if your spouse re-invests that income and earns further income on it then it will be taxed in his/her hands only according to the respective tax brackets. There is another exception in the case of pin money of spouse. If your spouse earns income from investing his/her pin money, then such income will not be clubbed in your income. That income will be taxed in the hands of your spouse only.
Income that arises directly or indirectly to your spouse from the assets transferred directly or indirectly to your spouse shall not be clubbed with your income in the following circumstances:
# The transfer is for adequate consideration.
# The transfer is under an agreement to live apart.
# The couple is no longer husband and wife at the time of the transfer or at the time of accrual of income.
Salary, Commission, etc. to spouse from a concern in which you have a substantial interest
In case your spouse earns a salary, commission, fees or remuneration from a company or a firm in which you have substantial interest, then such remuneration will be clubbed with the income of the spouse, whose total income (excluding income to be clubbed) is greater and then taxed accordingly. However, there is an exception to it. Such income earned by your spouse will not be subjected to clubbing provisions if your spouse possesses technical or professional qualification and the remuneration is solely attributable to application of that knowledge/qualification.
This clause is applicable on the condition that the relationship of husband and wife must subsist at the time of accrual of the income.
Income other than salary, commission, fees or remuneration is not subject to clubbing provisions.
Income from assets transferred directly or indirectly to your son’s wife otherwise than for adequate consideration will be clubbed with your income and taxed accordingly. If you transfer an asset to a person or AOP (Association of Persons), for the immediate or deferred benefit of your daughter-in-law, without adequate consideration, directly or indirectly, then income from such asset will be clubbed with your income.
But if a person receives any gift at the time of marriage or by inheritance or under a will, and any income is derived out of the investment of such gift, then it will not be subjected to clubbing provisions. Though these types of gifts are not taxable gifts but the person receiving it is supposed to pay tax on the income derived from its investment.
Transfer of Income without transfer of asset
If you transfer income from an asset to another person by way of an agreement or some other arrangement; but retain the ownership of that asset, then according to clubbing provisions the transferred income will be clubbed with your total income for taxation.
Note: If by reason of application of any of the above clubbing provisions if you are getting taxed in respect of income of any other person, then you should be eligible to claim related losses or expenses incurred by that other person, because the term “income” also include negative income.
(The author is Head of Tax Research, H&R Block India)