Home Income Tax You May End-up Paying Tax on Spouse Income

You May End-up Paying Tax on Spouse Income

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Clubbing of Income

Clubbing of income means Income of other person included in assessee’s total income, for example: Income of husband which is shown to be the income of his wife is clubbed in the income of Husband and is taxable in the hands of the husband. But income earned by wife on income clubbed in the hand of husband is taxable in the hand of wife only. Under the Income Tax Act a person has to pay taxes on his income.

Clubbing of IncomeA person cannot transfer his income or an asset which is his one of source of his income to some other person or in other words we can say that a person cannot divert his income to any other person and says that it is not his income. If he do so the income shown to be earned by any other person is included in the assessee’s total income and the Assessee has to pay tax on it.

Specified persons to club income

Income of any and every person cannot be clubbed on a random basis while computing total income of an individual and also not all income of specified person can be clubbed. As per Section 64, there are only certain specified income of specified persons which can be clubbed while computing total income of an individual. Specified scenarios when you can club income:

Section Specified person Specified scenario Income to be clubbed
Section 60 Any person Transferring income without transferring asset either by way of an agreement or any other way, Any income from such asset will be clubbed in the hands of the tranferor
Section 61 Any person Transferring asset on the condition that it can be revoked Any income from such asset will be clubbed in the hands of the transferor
Section 64(1A) Minor child Any income arising or accruing to your minor child where child includes both step child and adopted child. The clubbing provisions apply even to minor married daughter. Income will be clubbed in the hands of higher earning parent.
Note:
If marriage of child’s parents does not subsist, income shall be clubbed in the income of that parent who maintains the minor child in the previous year

If minor child’s income is clubbed in the hands of parent, then exemption of Rs. 1,500 is allowed to the parent.

Exceptions to clubbing
Income of a disabled child (disability of the nature specified in section 80U)

Income earned by manual work done by the child or by activity involving application of his skill and talent or specialised knowledge and experience

Income earned by a major child. This would also include income earned from investments made out of money gifted to the adult child. Also, money gifted to an adult child is exempt from gift tax under gifts to ‘relative’.

Section 64(1)(ii) Spouse** If your spouse receives any remuneration irrespective of its nomenclature such as Salary, commission, fees or any other form and by any mode i.e., cash or in kind from any concern in which you have substantial interest* Income shall be clubbed in the hands of the taxpayer or spouse, whose income is greater (before clubbing). Exception to clubbing: Clubbing is not attracted if spouse possesses technical or professional qualifications in relation to any income arising to the spouse and such income is solely attributable to the application of his/her technical or professional knowledge and experience
Section 64(1)(iv) Spouse** Direct or indirect transfer of assets to your spouse by you for inadequate consideration Income from out of such asset is clubbed in the hands of the transferor. Provided the asset is other than the house property.

Exceptions to clubbing No clubbing of income in following cases:

a. Where asset is received as part of divorce settlement

b. If assets are transferred before marriage

c. No husband and wife relationship subsists on the date of accrual of income

d. Asset is acquired by the spouse out of pin money (i.e. an allowance given to the wife by her husband for her personal and usual household expenses)

64(1)(vi) Daughter-in-law Transfer of assets transferred directly or indirectly to your daughter in-law by you for inadequate consideration Any income from such assets transferred is clubbed in the hands of the transferor
64(1)(vii) Any person or association of person Transferring any assets directly or directly for an inadequate consideration to any person or association of persons to benefit your daughter in-law either immediately or on deferred basis Income from such assets will be considered as your income and clubbed in your hands
64(1)(viii) Any person or association of person Transferring any assets directly or directly for an inadequate consideration to any person or association of persons to benefit your spouse either immediately or on deferred basis Income from such assets will be considered as your income and clubbed in your hands
Section 64(2) Hindu Undivided Family In case, a member of HUF transfers his individual property to HUF for inadequate consideration or converts such property into HUF property Income from such converted property shall be clubbed in the hands of individual

Illustration :
Mr Ratan holds gifted Rs. 6,00,000 to his wife. Mrs Ratan has then invested the same amount in the fixed deposit. Mrs Ratan receives the interest of 5,000 p.a. from such fixed deposit. As Mr Ratan has transferred Cash (asset) without adequate consideration and it was converted into another asset by Mrs Ratan. Hence, interest earned of Rs. 5,000 from the converted asset (fixed deposit) will be clubbed in the income of Mr Lucky as per section 64(1)(iv) of the income tax act.

Note: 

If in the above case Mr Ratan transfers the cash as a settlement for divorce then clubbing provisions will not apply. Also, if the cash was transferred before marriage and interest is accrued after marriage, no income shall be clubbed in the hands of Mr. Ratan.  Hence, husband-wife relationship should remain at the time of transfer of asset and also at the time of accrual of income.

Important Provisions:

  • The clubbing provision applies to Income and loss both.
  • Capital gain on further transfer of the asset by the transferee will be considered as income and it shall be clubbed in the income of transferor.
  • The income derived from the converted form of asset shall be clubbed in the hands of transferor.
  • If part consideration is payable or paid, then only the inadequate consideration will be clubbed in the hands of the the transferor
  • The clubbing provisions will not apply on the income derived from the clubbed income.

Illustration :

If a Security is transferred for Rs. 6 lakh to the spouse or daughter-in-law without adequate consideration and interest of Rs. 20,000 on such security is clubbed in the hands of the transferor. However, if the spouse or daughter-in-law further earns any income from such interest of Rs. 20,000, no clubbing provisions shall apply on such income.

FAQs on Clubbing of Income

Q.1 What is the meaning of clubbing of income?

Ans. ​​​​​​​​​​Normally, a person is taxed in respect of income earned by him only. However, in certain special cases income of other person is included (i.e. clubbed) in the taxable income of the taxpayer and in such a case he will be liable to pay tax in respect of his income (if any) as well as income of other person too. The situation in which income of other person is included in the income of the taxpayer is called as clubbing of income. E.g., Income of minor child is clubbed with the income of his/her parent. Section 60 to​ 64​ contains various provisions relating to clubbing of income.​

Q.2 Do any clubbing provisions exist in case of transfer of income without transfer of asset?

​​​​​​​​​​Ans. As per section 60​​, if a person transfers inco​me from an asset owned by him without transferring the asset from which the income is generated, then the income from such an asset is taxed in the hands of the transferor (i.e., person transferring the income).

Q.3 Do any clubbing provisions exist in case of a revocable transfer?

Ans. ​​​​Revocable transfer is generally a transfer in which the transferor directly or indirectly exercises control/right over the asset transferred or over the income from the asset. As per section 61​, if a transfer is held to be a revocable, then income from the asset covered under revocable transfer is taxed in the hands of the transferor. The provisions of section 61 will not apply in case of a transfer by way of trust which is not revocable during the life time of the beneficiary or a transfer which is not revocable during the lifetime of the transferee.​

Q.4 Can remuneration received by spouse of an individual be clubbed with his/her income?

Ans. ​​​​Under certain circumstances as given in section 64(1)(ii), remuneration (i.e., salary) received by the spouse of an individual from a concern in which the individual is having substantial interest is clubbed with the income of the individual. Provisions in this regard are as follows:

  • The individual is having substantial interest in a concern (*).
  • Spouse of the individual is employed in the concern in which the individual is having substantial interest.
  • The spouse of the individual is employed without any technical or professional knowledge or experience (i.e., remuneration is not justifiable).

(*) An individual shall be deemed to have substantial interest in any concern, if such individual alone or along with his relatives beneficially holds at any time during the previous year 20% or more of the equity shares (in case of a company) or is entitled to 20% of profit (in case of concern other than a company).

Relative for this purpose includes husband, wife, brother or sister or lineal ascendantor descendent of that individual [ section 2(41)]

Q.5 Can income from assets transferred to spouse without adequate consideration be clubbed with the income of transferor-spouse?

Ans. ​​​​​As per section 64(1)(iv), if an individual transfers (directly or indirectly) his/her asset (other than house property) to his or her spouse otherwise than for adequate consideration, then income from such asset will be clubbed with the income of the individual (i.e., transferor). Income from transfer of house property without adequate consideration will also attract clubbing provisions, however, in such a case clubbing will be done as per sec​tion 27​ and not under section 64(1)(iv). The clubbing provisions of section 64(1)(iv) will apply even if the form of asset is changed by the transferee-spouse.  ​

Q.6 Are there any situations in which the clubbing provisions do not apply in case of income from assets transferred to spouse?

Ans. ​​​​The clubbing provisions of section 64(1)(iv)​ are not applicable in the following situations:

  • If the transfer of asset is for adequate consideration;
  • If the transfer of asset is in connection with an agreement to live apart;
  • If the asset is transferred before marriage, no income will be clubbed even after marriage, since the relation of husband and wife should exist both at the time of transfer of asset and at the time of accrual of income;
  • If on the date of accrual of income, transferee is not spouse of the transferor (i.e. the relation of husband and wife does not exist).​

Q.7 Can income from assets transferred to son’s wife without adequate consideration be clubbed with the income of transferor, i.e., father-in-law/mother-in-law?

Ans. ​​​​As per section 64(1)(vi)​​, if an individual transfers (directly or indirectly) his/her asset to his/ her son’s wife otherwise than for adequate consideration, then income from such asset will be clubbed with the income of the individual (i.e., transferor being father-in-law/mother-in-law). The provisions of clubbing will apply even if the form of asset is changed by the transferee-daughter-in-law. If the asset is transferred before marriage of son, no income will be clubbed even after marriage, since the relation of father-in-law/mother-in-law and daughter-in-law should exist both at the time of transfer of asset and at the time of accrual of income. If on the date of accrual of income, the relation of father-in-law/mother-in-law and daughter-in-law does not exist, then the provisions of clubbing will not apply. ​

Q.8 Can income from assets transferred to any person for the benefit of spouse or for the benefit of son’s wife without adequate consideration be clubbed with the income of transferor?

Ans. ​​​​​As per section 64(1)(vii), if an individual transfers (directly or indirectly) his/her asset otherwise than for adequate consideration to a person or an association of persons for the immediate or deferred benefit of his/her spouse, then income arising from the asset so transferred will be clubbed with the income of transferor.

As per section 64(1)(viii)​, if any individual transfers (directly or indirectly) his/her asset otherwise than for adequate consideration to a person or an association of persons for the immediate or deferred benefit of his/her son’s wife, then income arising from the asset so transferred will be clubbed with the income of transferor.​

Q.9 Is minor child’s income clubbed with the income of parent? |How can parent claim TDS deducted on his minor’s child income?​

Ans. ​​​​​​As per section 64(1A) , income of minor child is clubbed with the income of his/her parent (*). Income of minor child earned on account of manual work or any activity involving application of his/her skill, knowledge, talent, experience, etc. will not be clubbed with the income of his/her parent. However, accretion from such income will be clubbed with the income of parent of such minor.

Income of minor will be clubbed with the income of that parent whose income (excluding minor’s income) is higher. If the marriage of parents does not sustain, then minor’s income will be clubbed with the income of parent who maintains the minor.

In case the income of individual includes income of his/her minor child, such individual can claim an exemption under section 10(32)) of Rs. 1,500 or income of minor so clubbed, whichever is less. (*) Provisions of section 64(1A) will not apply to any income of a minor child suffering from disability specified under section 80U. In other words income of a minor suffering from disability specified under section 80U will not be clubbed with the income of his/her parent.

Q.10 Will any clubbing provision apply in case of transfer of asset to Hindu Undivided Family (HUF) by its member?

Ans. ​​​​As per section 64(2)​, when an individual, being a member of HUF, transfers his property to the HUF otherwise than for adequate consideration or converts his property into the property belonging to the HUF (it is done by impressing such property with the character of joint family property or throwing such property into the common stock of the family), then clubbing provisions will apply as follows:

  • Before partition of the HUF, entire income from such property will be clubbed with the income of transferor.
  • After partition of the HUF, such property is distributed amongst the members of the family. In such a case income derived from such property by the spouse of the transferor will be clubbed with the income of the individual and will be charged to tax in his hands.​

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