Tax Talk: Tax treatment of income earned by a dependent

By: | Published: October 6, 2015 12:07 AM

Investments made by an individual in the name of a minor, spouse or daughter-in-law have to be included in his taxable income.

Investments made by an individual in the name of a minor, spouse or daughter-in-law have to be included in his taxable income. Aggregation of other’s income could increase one’s effective tax rate unless the income per se is exempt.

Income of minor child

A minor child’s income has to be clubbed with that of either parent (whose total income is higher). While doing so, the parent can claim exemption up to R1,500 per minor child. Consequently, income such as interest from fixed deposits or savings account in minor’s name needs to be clubbed with the parent whose income is higher. The clubbing provisions, however, do not apply to a minor suffering from specific disabilities, or from any minor child with respect to income from manual work, or from application of the child’s skill, talent or specialised knowledge or experience.

Income from assets in spouse’s name

Your spouse may be the legal owner of the asset. But if such investments are made in his/her name without any cash funding from his/her side, such income are to be clubbed in the hands of the individual. Interest from deposits and gains from trading are a few examples. The clubbing provisions also apply to assets transferred (directly/indirectly) to spouse without adequate consideration (except if it relates to a separation agreement as discussed below).

Obviously, transfer of income without transfer of assets also comes in the ambit of clubbing. Gifts by an individual in the form of cash are not taxable in the hands of the spouse. However, the spouse’s income out of any investments made from such cash are to be included in the individual’s tax return.

To apply these provisions, the relationship of husband and wife should exist at the time of transfer of asset and accrual of income. Hence, income from transfer of asset before marriage or for an agreement to live apart are not to be included. Similarly, income from assets transferred to daughter-in-law has to be clubbed in the hands of transferor father-in-law or mother-in-law if such relationship exists at the time of time of transfer of asset and accrual of income.

Salary from spouse’s business

Salary received by the spouse from the concern where an individual has substantial interest (e.g. beneficial ownership of at least 20% shareholding in a company) attracts clubbing if such a salary is received without application of technical or professional knowledge or experience. Nevertheless, income of married couples working jointly in a family business with requisite qualification is viewed separately.

How to furnish details in returns

No separate tax calculation is required. The income has to be first computed in the hands of the receiver (spouse/minor child/daughter-in-law) against which expenses allowed under the respective head can be claimed.

The resulting income or loss will then have to be clubbed with the total income of the individual. An asset transferred in the form of a house property is an exclusion to this rule as the transferor is deemed to be owner of such a property. One should save the investment details and income statements of your dependents along with your documents for ease of reference while reporting the income.

In short, all the usual options — gifting of money, buying an asset, transferring it and assigning the income — are considered by taxman to discourage planning avenues. Understand your responsibilities and include the income of dependents that are sourced from you.

The writer is director, Deloitte Haskins & Sells LLP. With inputs from Lakshmi Pichaimani, manager, Deloitte Haskins & Sells LLP

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