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Understanding Income Tax Provisions for Clubbing of Income in India
You must have heard people saying saving income tax is very easy. They transfer a part of their income to their wife, children, parents and relatives to bring their income below taxable limit. Then! surprise knocks on their door in the form of scrutiny notices served by Income Tax Department. Taking these shortcuts can put you in trap of section 64 (clubbing of income) of income tax department inviting the wrath of income tax department. ????
Today we'll simplify and explain all the rules of Clubbing of Income in detail. To file your income tax return and maximize your refund, get in touch with our eCAs.
What is Clubbing of Income?
If income of any other person is included in your income and taxed in your hands, such process is called Clubbing of Income. Let's say you have a total income of ? 3,00,000. It comprises of salary income worth ? 2,00,000 & rental income of ? 1,00,000. With aim to fall below basic exemption, you transfer rental income without any proof to your wife. Now, while calculating tax, your taxable income shall be taken at ? 3,00,000 not ? 2,00,000. Even though you assumed that ? 1,00,000 will be taxed in your wife's hand. This is due to the provisions of Clubbing of Income.
The provisions of clubbing of income are covered under section 64 of the Income Tax Act, 1961.
When will Clubbing of Income applies on you?
There are many different scenarios to which provision of Clubbing of Income applies. Let us discuss each of them one-by-one.
Transfer of Income without Transfer of Asset
Understand this with a simple example. You are earning rental income from one of your house property of ? 10,000 p.m. Now, let's say, you plan to give that rental income to your friend Mr. X from this year but keeping the ownership still with you. In that case, as per the provisions of Clubbing of Income, ? 10,000 p.m. will be included and taxed in your hands and not in hands of Mr. X. This is because you transferred only the income and not the asset (here, house property).
Revocable Transfer of Asset
When you transfer asset to another person keeping a clause in the transaction which empowers you to take back the ownership anytime in future. Such a situation is called as Revocable Transfer.As per provisions of Clubbing of Income, when a revocable transfer of asset is made then any income from that asset shall be taxable in hands of transferor. [Transferor: person who transfer asset. Transferee: person who receives the asset.]
For instance, Karan transferred his house property to Arjun. There is a condition in agreement that asset will transfer back to Karan after 2 years. Now, as per clubbing of income, any income arising to Arjun from such house during 2 years will be included in Karan's income.
Till now, we have understood the basic provisions in Clubbing of Income. Let us dive-in further and discuss about Clubbing of Income in case of spouse, son's wife, minor child and HUF.
Clubbing of Income of Spouse
In common parlance, easiest way to save tax is practiced by transferring of income in the name of your spouse. There are very special provisions to regulate such transfers. All the different scenarios are discussed as below.
Your spouse works in a concern/entity in which you have substantial interest. There are 2 aspect in this situation, discussed as below:
Your spouse is employed because of his/her professional/ technical qualification. Provision of Clubbing of Income will not apply. In other words, that remuneration will be taxable in the hands of your spouse only.
For e.g. You are partner in a firm and entitled to 40% share in profits. Your wife is employed in the same firm as general manager at ? 20,000 p.m. due to her professional capacity then such income shall not be clubbed in your hand.
No such professional/ technical qualification. Any remuneration received by your spouse from such concern/ entity shall be clubbed and taxed in your hands.
- When you and your spouse receive remuneration from a concern and both have substantial interest in that concern: In such case, remuneration of both will be clubbed in hands of that spouse whose income excluding remuneration is higher. However, as per common view, if both spouse are earning remuneration due to their professional competence then provisions of clubbing shall not apply.
Note : Substantial interest means when you are entitled to not less than 20% share of profits (in case of firm) or not less than 20% voting power (in case of company).
- If you have transferred any asset to your wife without adequate consideration :In this case, income from such asset shall be taxable in your hands. This provision of clubbing of income will not apply in case asset is transferred for adequate consideration or as a condition of divorce or it was transferred before marriage. It is a very common practice, where husband transfers an income earning asset in his wife's name to save tax. These provisions have been introduced to target such tax saving practice.
Clubbing of Income in case of Son's Wife
Clubbing of income provisions also apply in case of any transfer of income made to your daughter-in-law. The situation is discussed as below.
- Asset has been transferred to your daughter-in-law without any proper consideration :In this case, any income generating from that asset will become taxable in your hands. For e.g. you have, 10,000 10% Debentures of Rs 100 each which you transferred to your daughter-in-law without any consideration. Now interest income of Rs 1,00,000 will be included and taxed in your hands.
Clubbing of Income of Minor Child [Less than 18 years]
Any income earned by minor child is clubbed in the hands of either of his/her parents, whose income (excluding minor child income) is greater. But department has given certain situations in which the clubbing of income provisions will not apply. These are:
- When minor child is suffering from any disability as mentioned in Sec 80U, or
- When income is earned by minor child through manual work, or
- Income earned by minor child through his talent, knowledge etc. For e.g. minor child wins money on TV shows like Indian Idol Junior winner, Voice India Kids etc.
Moreover, an exemption of Rs 1500 is provided on income earned by each minor child. Do not forget to claim this exemption folks!
Clubbing of Income of Major Child
There are many people who ask, what about income earned by his/her major child? There is no need for a special provision in such case. A major child is by default is covered under taxable limit applicable to an individual up to 60 years of age. So, if your major child is earning income above ? 2,50,000 (before any deduction). Then he is liable himself to file his income tax return. No clubbing of income provisions shall apply.
Clubbing of Income & HUF
Existence of Hindu Undivided Family has been since ages. Income Tax provisions also recognize HUF as an assessee. In simple terms, an HUF is also liable to file income tax return. To read about HUF as an assessee, read our blog. Hence, it's obvious that clubbing of income provision is also attracted in case of HUF.
- If any of your personal assets has been transferred to the HUF without any adequate consideration:In such case, any income from such asset shall be taxed in your hands. For e.g. you have a house from which rental income of ? 5,00,000 p.a. is earned by you. When you transfer this house to HUF without consideration then income of ? 5,00,000 will be taxed in your hands only.
Till now, we shared how income tax department can nab your income using clubbing of income provisions. But like it's said when there's a will, there's a way. Now, we'll share some super-cool tips, using which you can magnify your income tax savings.
- Gift money to your wife or daughter-in-law before marriage. If your wife/ daughter-in-law is not working, then you can save income up to ? 2,50,000. But it is imperative to note that, this can be done only before marriage. If you give any money after marriage then clubbing provisions shall apply.
- Pay rent & save money. If you are living with your parents and the house is in their name. Then you can pay rent to them and claim exemption of house rent allowance. Also, if you parents do not earn any other income, they can claim further benefit. They will fall below basic exemption limit and will have to pay less income tax.
- Avail Benefit of Sec 80 C Limit of Your Family Members – If you have exceeded your own 80 C limit (? 1,50,000), you can gift some money to your spouse or your parents.Then they can invest this money in a tax-free option such as PPF, Mutual Funds etc. u/s 80 C. It is to be noted that any future income from these instruments is tax-free in the hands of your spouse/parents.
- Health insurance of family members. You can further claim deduction u/s 80 D by getting a health insurance for your family. Maximum deduction which can be claimed is ? 25,000. But if you get it for you parents who are very senior citizen then deduction will be of ? 30,000.
- You can get in touch with our eCAs. This is the best and easiest option of all. Our eCAs are industry's best tax experts with aim to maximize your tax saving. You just call us and relax!
How to file ITR in case of Clubbing of Income?
Clubbing provisions not only affect your income calculation but also the way return is filed. The best way to understand is through an example:
Mr. Happy has only salary income of ? 6,00,000. He has a minor son Master Super Happy. Now Super Happy is a happy go lucky chap. He likes to play lottery games with his papa Mr. Happy. One fine day, Super Happy became super lucky and won ? 2,00,000. Since, Super Happy is minor therefore his income will be clubbed in Mr Happy's income. Now Mr. Happy has to file his return in form ITR 2. If there would have been no lottery income of his minor son then he'd have used ITR 1 Form.
The basic point is that, depending upon the nature of income to be clubbed ITR Form will vary. So next time, please keep in mind before choosing your ITR Form if you have any clubbed income.
The concept of clubbing of income is very technical and confusing if not understood properly. Using any tax saving technique without proper consultation or guidance can lead you to trouble in the form of penalties and prosecution. Also, as the ITR filing date coming closer, you can file return for free by visiting Tax2Win.
We hope that after reading the above blog, concept of Clubbing of Income has become understandable for you. In case of any further assistance regarding tax management, please get in touch with our eCAs. We are here to help you 24×7. Happy Filing ????