Clubbing of Income

In the Indian Income Tax Act there are provisions of Clubbing of Income.

 

But , the question is What is Clubbing of Income and why it is so?

 

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.

     Income of a minor child is taxable in the hands of his parents.

 

Why it is so?

Under the Income Tax Act a person has to pay taxes on his income. A 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.

For example: A purchased a house property in the name of his wife B. A let out this house property . The rental income earned by A in name of his wife B is taxable in the hands of A.

 

Clubbing of Income takes place in the following cases:

1. Transfer of income without transfer of Asset:  If any person transfers income without transferring the ownership of  the asset , such income will be taxable in the hands of the transferor. Ex. X owns 4000, 14% debentures of A ltd. of Rs. 100 each , he transfers interest income to his friend Y without transferring the ownership of Debentures . In this case although interst will be received by Y but it is taxable in the hands of X.

 

2.Revocable transfer of Asset: If any person transfers any asset to any other person in such form and condition that such transfer is revocable at any time during the lifetime of the transferee , the income earned through such asset is chargeable to tax as the income of the transferor. For ex. X transfers a house property to A. However , X has right to revoke the transfer during the life time of A . It is a revocable transfer and income arising from the house property is taxable in the hands of X.

 

3. Remuneration to Spouse: An individual is chargeable to tax in respect of any remuneration received by the spouse from a concern in which the individual has *substantial interest. This provision has an exception. If the remuneration is received by spouse by the application of technical or professional knowledge or experience clubbing provisions will not take place. For ex. X  has substantial interest in A ltd. and Mrs. X is employed by A ltd. without any technical or professional qualification. In this case salary income of Mrs. X shall be taxable in the hands of X.

 

4. Income from assets transferred to spouse: Where an asset is transferred by an individual to his spouse directly or indirectly, otherwise than for adequate consideration or in connection with an agreement to live apart, any income from such asset is deemed to be the income of the transferor. For ex.  Mrs. A transfer’s 100 debentures of IFCI to her husband without adequate consideration. Interest income on these debentures will be included in the income of Mrs. A.

 

5. Income from asset transferred to son’s wife: If an individual , directly or indirectly transfers asset , without adequate consideration to son’s wife , income arising from such asset is included in the income of the transferor. For ex.  Mrs. A transfer’s 100 debentures of IFCI to her son’s wife without adequate consideration. Interest income on these debentures will be included in the income of Mrs. A.

 

6. Income from asset transfer to a person for the benefit of spouse/ son’s wife: If an individual , directly or indirectly transfers asset , without adequate consideration to a person or an association of persons for the benefit of his/her spouse /son’s wife , income arising from such asset directly or indirectly is included in the income of the transferor. For Ex. X transfers Government bonds without consideration to an association of persons, subject to the condition that , the interest income from these bonds will be utilized for the benefit of Mrs. X or Mrs. X son’s wife . Interest from bonds will be included in the income of X

 

7. Income of a minor child: All income which arises to the minor shall be clubbed in the income of his parents. Income will be included in the income of that parent whose total income is greater.  This case has two exceptions.(1) Income of minor child suffering from specified disability . (2) Income of minor child on account of manual work or involving application of his skill/talent etc.

 

 

*Substantial Interest: An individual is deemed to have substantial interest if he beneficially holds equity shares carrying not less than 20% voting powering case of a company or is entitled to not less than 20% of the profits in case of a concern other tan a company , at any time during the previous year.

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6 Responses to “Clubbing of Income”

  1. Sohil Says:

    Whether Income of Minor is clubbed head wise or Assesment of minor is done Separately as if he is separate assessse and than clubbed in the income of Parent

    • Vivek Says:

      Income of minor is clubbed headwise as if it is income of the parent in whose income the income of minor is clubbed.

  2. Ganesh Says:

    hi, i want to know whether the second joint holder of Demat a/c can show gain arise in sale of shares in his return of income? the first holder doesn’t have any source of income but the second holder have.

  3. Babu Says:

    I would like be extremely thankful if you could clarify the following wrt gifting some money to daughter in law.
    The married son dies and his parents would like to gift some money to the daughter-in-law for her future.
    As per tax laws, I understand that the gift can be made to daughter in law by her in laws since it is well within the definition of “Relatives”. However, I understand that if father in law gifts to daughter in law, then any income earned out of the gifted amount will be clubbed to father in law. I understand that that the other alternative to avoid clubbing is for the father in law to write a will in which case, the daughter in law will get the money only after her father in law.
    I would be extremely thankful if you can clarify whether fatherin law can gift to daughter in law without attracting clubbing provision since the son is no more?.

  4. shivangi verma Says:

    Its too good and so helpful for exam…
    .THANKS.

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