Clubbing provision under the Income Tax Act-1961

Normally, individual taxpayers are liable to pay the tax on their income alone. However, in certain special cases, income of other person needs to be included in the taxable income of the taxpayer and in such a cases, he will be liable to pay tax in respect of his own individual income as well as income of that other person. Income Tax Act is an interesting piece of legislation which one must know. Ignorance has its own cost & consequences which is too high now.

The situation in which income of other person is required to be included in the income of the taxpayer is referred to as “Clubbing of Income”. The idea behind clubbing provision is to control the tax avoidance by an individual who has a lot of assets & hence is looking to spread to investment in different names. “It’s all in the family’ may be accepted by all but not the taxmen.

Following are the cases where clubbing provisions get invoked:

1. Income from assets transferred to spouse:

   
   Where an asset is transferred by an individual to the 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 example, if amount is transferred by husband to the account of wife who in turn makes an FDR/Investment in her name then Income by way of Interest etc from such investment/FDR would not be treated as her individual income but would be clubbed with the income of husband for taxation.

2. Income of Minor:
   

   Minor’s income is required to be clubbed with the income of the parents.  Making investment in the name of Minor by the parents would not result in tax saving. It is to be clubbed in the hands of the parent whose total income is higher (before including the minor’s income). If the parents are divorced, it is clubbed with the person who is maintaining the child.
   However, the clubbing provision is not applicable if the minor has earned an income because of own manual work, or out of talents or specialized knowledge & experience. Further, clubbing provision is also not applicable in case of a minor who is disabled (based on definition of disability in Section 80U). Whenever minor child’s income is clubbed, exemption up to Rs 1,500/- for each such minor child is available to the parents. For example, if clubbed income is more than Rs 1500, Rs 1500 is the maximum exemption. However, if income clubbed is say Rs. 1,000/- then exemption is limited up to such lesser amount i.e., Rs. 1,000/- in this case.

   Clubbing provision is not applicable in respect of gift done to major son/daughter. Income earned by major son/daughter out of the gifted amount would be treated as their individual income & would not be subject to clubbing provision.

3. Transfer of Income without transferring Assets:

   When any taxpayers transfers the income by agreement or any other way to any other person without transferring the ownership of asset then income would still be taxable in the hands of owner. Even though income is received by such other person, it would be considered as income of the owner only.

4. Transfer of Asset under revocable terms:

   If any assets transferred by the owner with a power/rights to revoke / cancel the ownership then income would be taxable in the hands of original owner only.

5. Salary/Remuneration etc to Spouse:
   

   If a salary, remuneration etc is offered to spouse by a company or a firm in which the other spouse have substantial interest, then such salary etc will be clubbed with the income of other spouse. Substantial Interest means holding of 20% or more stake in the co. or firm either individually or jointly with the relatives (husband, wife, brother, sister or your lineal ascendant or descendant). Only exception is when the spouse receives the salary due to his/her application of technical or professional knowledge & experience. In such case, the clubbing provision will not get attracted.

6. Clubbing of Income of a Son’s Wife:
   

   If any assets is transferred to son’s wife, directly or indirectly, without adequate consideration then such income will not be taxed in the hands of the person receiving it but will be clubbed with the income of mother-in law or father-in-laws.

7. Converting Individual property to HUF’s property:
   

   If any member of the HUF transfer his own assets to HUF without consideration (i.e., throw his assets to the common hotchpotch), income from such assets would be taxable in the hands of individual transferring the assets and not in the hands of HUF [Section 64(2)].

It may be noted that clubbing provision. As incorporated in section 64 of the Income Tax Act, 1961 applies to first generation of income only. So, if wife invests Rs. 1 Lakh in Bank FDR @ 8% out of the amount gifted by husband then Rs. 8,000/-would be taxable in the hands of husband. Subsequent income out of the investment of Rs. 8,000/- will not be subject to clubbing provision-Popatlal Bhikamchand V. CIT (1959)36 ITR 577 (Bom)].

Gift or Transfer of funds to the family members or investment in their name could be a genuine emotional expression. At the same time, it could be a powerful tool to reduce the overall tax impact as well. However, before using the gift as a tool of tax planning, one must understand the clubbing provision.

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