This club may not be exquisite but is indeed expensive!

Written by N S Sundar | Jeevitha C | G Sairam | Updated: Sep 1 2009, 05:15am hrs
I earn income, I pay taxes - logical, you earn income, I pay taxes - not so logical. Thats exactly what the taxman mandates by the so-called clubbing provisions. It is perceived by the taxman that there is a tendency amongst taxpayers in higher tax brackets to divert a part of their income to their near and dear to reduce their tax burden. To curb the practice, provisions have been incorporated in the Income-tax Act to include income arising to one person (perceived as the legal but not real owner of the income) in the income of another (perceived as the real owner of the income) while computing tax liability of the latter.

Transfer of income alone without transfer of the source of earning that income is a sure-fire way to attract the clubbing provisions. For instance, creation of overriding title upon another person with respect to income from a house without actual transfer of the house for adequate consideration will not relieve the owner of the house from his liability to pay tax on house property income.

Transfer of asset in a loose fashion making it revocable by the transferor at any point of time would also invoke clubbing provision instantaneously. Even when the transfer is not revocable during the lifetime of the transferee, the income will be taxed in the hands of transferor as and when the power to revoke the transfer arises.

Income arising to spouse would be clubbed with the income of an individual if it is earned from a concern in which the individual has substantial interest unless the spouse possesses technical or professional qualifications and the income is solely attributed to their application. Married ladys income would be assessed in a separate income-tax file independent of her husband provided it is earned from her own sources. Her sources may be by way of gifts from anyone except her husband, father-in-law and mother-in-law. She may even take a loan from her husband and earn income by investing in house property, shares etc. The precaution required in such a case is that interest charged on the loan by the husband should be a reasonable one. Post-engagement pre-marriage period need not just be fun. It may also be a period of good planning for your future - transfer taking place before marriage to a fiance could not be subjected to clubbing provisions.

Clubbing provisions in case of non-residents is inextricably linked to the place of accrual or receipt of income. For example, income from an asset transferred by a non-resident individual to his wife is subject to clubbing provision only if the income is accrued or received in India.

Another interesting point on the clubbing provision is its close ties with the point of vesting of income. While income arising to a minor child would generally get clubbed with that of the parent whose total income is greater, deferment of the benefit accumulating to a minor child beyond the period of minority i.e. till the child attains majority would give reprieve to the parent from the clutches of clubbing. It is pertinent to note here that income out of the activity involving application of minor childs skill, talent or specialized knowledge or income accruing to a minor child suffering from any permanent physical disability would not be subjected to clubbing. Even in other cases, no clubbing would be made as long as income arising in respect of each minor child does not exceed Rs 1,500 (one thousand five hundred). While the Damocles sword of clubbing always hangs above ones head, it may be noted that genuine gifts of money from relatives backed by sufficient evidence would not be taxed. Also, clubbing is not always bad. Tax law says income includes loss. When income can be clubbed so can the losses. Thus there is a possibility that your net tax burden may decrease due to clubbing. Well, if you do dare consider transfer of loss making assets to your wife, good luck!

The authors are with Pricewaterhouse Coopers