Clubbing of Income

CA. Ajay Khandelwal

What is Clubbing of Income ?

When income of a person is added in income of another person and is taxable in the hands of that another person , it is called clubbing under Income Tax Provisions. So, here we will discuss some of such cases.

Transfer of Income only without transfer of Asset

As per Section 60, if a person transfers to another person, any income generated from any asset, without transferring that asset, then such income will be treated as income of transferor himself. For example, Mr. X has FD in own name and the interest thereon is deposited by him in account of Mr. Y. In such case, such interest will be deemed to be income of Mr. X and taxable in the hands of Mr. X only.

However, Section 61 says that in such a case even if asset is also transferred, but it is a revocable transfer, then also income will be deemed to be the income of transferor only. But, if such transfer is not revocable during the lifetime of transferee, then clubbing provision will not be attracted.

What is Revocable Transfer

A transfer arrangement will be called revocable if there is a provision of re-transfer of that income or assets back to the transferor wholly or partly or it gives right to transferor to re-assume power over such income or asset.

Clubbing of Remuneration of Spouse

If a person gets remuneration from a firm in which his/her spouse has substantial interest, then such remuneration will be clubbed back in income of spouse having substantial interest. It may be salary, commission, fees or any other remuneration. Here, 20% or more interest(own and including relatives) will be called as substantial interest. So, in a proprietorship firm, the proprietor has 100% interest. Similarly, if a partner is entitled to 25% profits of a partnership firm, then he will be called having substantial interest in that firm. Relative here means husband, wife, brother, sister or any lineal ascendant or descendant)

For example, Mr. X is a proprietor in M/s XYZ Enterprises. His income is Rs. 600000/- He gives salary of Rs. 20000/- per month to wife, totaling Rs. 240000/- for the year. In such case, Rs. 240000/- will be added in income of Mr. X and his income will be Rs. 840000/-.

Case when there will be no clubbing

There will be no clubbing if spouse has technical or professional qualification & income is fully attributable to such knowledge & experience. For example, Mr. A runs a Hospital and gives salary to his wife who is a Doctor. In such case, salary to wife will not be clubbed in income of Mr. A.

What if both husband and wife have substantial interest

If both husband and wife have substantial interest and both get remuneration, then clubbing will be in the income of that spouse, whose total income, excluding this remuneration, is higher.

Clubbing of Income from Asset transferred to Spouse

Where there is transfer of asset by a person to spouse without adequate consideration, then income from such asset will be clubbed back in income of transferor. Gifts are covered here. For example, Mr. P makes FD from his bank account in the name of his wife as a gift. Then interest on such FD will be treated as income of Mr. P himself. Therefore, it is suggested that a husband should not make gift to his wife even if gift income is exempt for wife under Section 56(2). However, gift of House Property is not covered here as it is already covered under Section 27. Section 27 says that is a house property is gifted by a person to his wife, then still the transferor will be deemed to be the owner of house property. So, there is no need to attract clubbing provisions.

Exception

When the transfer of asset to spouse is in connection with an agreement to live apart, then above clubbing provisions will not get attracted, even where there is no consideration.

Clubbing of Income from Asset transferred to Son’s Wife

Section 64 provides similar provision of clubbing of income from asset transferred to son’s wife similar to the case of spouse. So, if a person transfers an asset to son’s wife without adequate consideration, then income from such asset will be clubbed back to income of transferor.

If the asset is transferred without adequate consideration to any 3rd party, for the benefit of spouse or son’s wife, still income from asset will be clubbed in transferor’s income.

No Chain of clubbing

There will no chain of clubbing of income earned from income. So, if the income from asset is invested and new income is generated from that, then such new income will not be clubbed. For example, if husband gifted FD to wife and interest on that FD was, say, Rs. 100000/-. Now, if this Rs. 100000/- is used for new FDR by wife, then interest on this new FD will not be clubbed and will be taxable in the hands of wife.

What if asset is invested as Capital of business

If the asset transferred to spouse/ son’s wife is invested in a business, income in the ratio of the value of that asset to the value of total investment on the first day of previous year will be clubbed. But if such investment is in Partnership firm, then only interest on capital, in same ratio, will be considered for clubbing.

Clubbing of Minor’s Income

It will be included in the total income of that parent, whose total income(excluding this income) is higher. Once clubbed in one parent, then always clubbing will be with the same parent, unless Assessing Officer deems necessary to do otherwise. If divorsed, clubbing will be with that parent who maintains the minor in the Previous Year.

Exemption from Minor’s clubbed income

There is an exemption of Rs. 1500/- per child out of such income clubbed.

When there will be no Clubbing

Minor’s income from manual work or use of skill or specialized knowledge or experience, will not be clubbed. Moreover, income of Minor having disability of Section 80U will also not be clubbed.

Clubbing on Transfer of personal property to HUF

In case of transfer of property by a member of HUF to his HUF, for inadequate consideration, income from property will be clubbed to member. If, on partition, the property is again distributed to all members, the portion received by spouse will attract clubbing.

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