Clubbing of income arises when someone tries to pass off their income as someone else's. Income tax department seeks full disclosure and transparency. Hence, clubbing provision curbs gainful transfer of assets.
The tax return filing season is here again. The Income Tax Department seeks full disclosure, accountability and transparency. It is your civic duty to hide nothing and includes even the smallest of income which you would be tempted to pass off as someone else’s to avoid paying tax. Remember, you may have to pay for your cleverness if you try to outsmart the taxman.
One such provision in the Income Tax Act, 1961 is the clubbing of income under Section 60 to 64.
Let’s suppose you are a taxpayer while your spouse is a homemaker. Since your spouse has no taxable income, you may be thinking of putting your money in a deposit under his/her name, declaring the interest earned in his/her return and escaping the tax payment because the income earned is less than the exemption limit. You were supposed to pay tax on this interest income along with your income initially. The essence of this transaction is clubbing of income.
The spectrum of clubbing is wide
There can be multiple scenarios for the clubbing. One, if you transfer income to another person without transferring the asset that generates the income, the income is considered yours. For example, if you have the ownership of a property but you transfer the rent received without transferring the asset, the rental income will be clubbed with yours. In a scenario where you transferred the asset but if the transfer is revocable- that is, you retain the right to take the asset back, then also, clubbing of income shall happen.
Quid Pro Quo, Ladies and Gentlemen
In simple terms, the clubbing of income shall happen even when you have transferred an asset but, you haven’t received an adequate consideration. Quoting the earlier example, the rent from the gifted property and interest from the fixed deposit will be clubbed in your income, since you have essentially gifted the deposit to your spouse without getting adequate consideration in return.
If you are wondering about changing the form of the asset to save the tax, then don’t.
The income will still be clubbed with yours. For instance, you gifted some money to your wife who in turn used it to buy some bonds, the interest earned will be clubbed with your income only. There is a small mercy though. Income earned from re-investment of such clubbed income is not clubbed. For example, if the interest on a bond is put away to buy mutual funds, the income from the mutual funds will be considered as the spouse’s.
Minors have a say
People practice getting away from the scope of taxation by investing in their minor children’s names. Income of a minor child is clubbed with the income of the parent, whose income is higher. In a case where the spouses have estranged and marriage is not sustaining, the income will be clubbed with that of the parent maintaining the minor child. The Income-Tax Act does not necessitate clubbing the income of the minor child if the child has earned an income by doing some manual work or applying skill, knowledge or talent. Also, you can claim an exemption of Rs 1500 or the minor’s income whichever is less. There is a respite though. Where income accrues to a minor child suffering from certain disabilities specified under Section 80U of the Income Tax Act, then clubbing provisions don’t apply.
ALSO READ: 5 different ways to e-verify ITR
What if you are paying a salary to your spouse?
If your spouse gets a salary from an entity in which you have a substantial interest, it can be clubbed with your income. It will be deemed that you have a substantial interest if you along with your relative are entitled to 20 per cent or more of the entity’s profits. If you are unable to justify the salary disbursed then, the income will be clubbed. The taxman looks at the professional competency, technical acumen and specific knowledge in order to evaluate the justification of the salary paid to the spouse.
However, if you have transferred an asset to your spouse in an agreement to live apart, then there is no clubbing. Similarly, if the asset is transferred before the wedding, there will be no clubbing of income. Also, if the man and wife relationship does not exist on the date of the accrual of the income from the transferred asset, there is no clubbing.