Clubbing of Income u/s 60-64
Generally, a person is taxed only in relation to the income earned by him. However, in some special cases the income of the other person is also included (i.e. compounded) in the taxable income of the taxpayer and in such he will be liable to pay tax on his income (if any) as well as on the income of the other person. That other person can be a husband/wife, son/daughter, parent or a relative or acquaintance. Tax will be calculated on this clubbed income and the taxpayer will have to pay tax simultaneously. Sections 60 to 64 give various provisions related to Clubbing of income.
However, the rule of clubbing does not apply to paying small expenses or income. It is applied only in certain situations. The situations in which another person's income is considered to be included in the assessee's income are as follows -
➤Giving income of property to wife without adequate documents
➤Giving property income to your daughter-in-law without adequate documentation
➤Minor Child is getting an adequate amount of income from somewhere.
➤Spouse’s income from any company that benefits you.
➤Transfer of property in the name of a family (HUF) of which you are also a member.
➤Transfer of income to someone else without assigning assets to
➤Temporarily give the property to someone else. (Revocable Transfer of Asset)
Clubbing of Husband/Wife’s Income
People use this method the most often in order to save tax, -transferring your own income to your spouse. In this case, the rules for clubbing income are as follows-
Earnings given to wife, if you have given some money to your wife, then that money will belong to her. But the tax will be calculated by adding that portion of earnings to your income. For example, if you have a FD in the name of your wife, then the interest received from it will be added to your earnings. However, if that interest (earnings) is reinvested, then the interest earned on it will be considered as wife's income. And the tax liability will be that of your wife.
Your wife / husband is working in the same firm, with their professional or technical ability. For example, you are a 50 percent shareholder in a firm and your wife is an HR manager in the same company. The wife also holds the degree required for this position (e.g. MBA). In such a situation, the rule of clubbing income will not apply. Your wife's salary will be considered her own income. It will not be clubbed in your income and the tax liability (if any) arises, shall be paid separately. But if the wife doesn’t hold the required degree, her earnings shall be clubbed with that of the husband.
If your wife or husband is getting remuneration from the company in which both of you are partners. In such a situation, the income of both husband and wife will be clubbed together. The entire income will be considered as the income of the person (husband or wife) whose income is higher. He/she shall also be responsible for filling the income tax on that entire earnings. But here too, if both the persons are able to earn any remuneration due to their professional qualifications, then the income of both will be considered separately. Clubbing of income will not arise.
(Note: To gain or hold a stake in a company or institution is determined by two facts- First- In case of a firm, you are getting at least 20 percent of the profit. Second- In case of a company, you have at least 20 percent voting power.)
If you have given any of your assets to your wife without adequate consideration. In such a situation, the income from that property will also be considered earned by you and not by your wife. That income will be clubbed in your income and you will also be liable for income tax (according to the tax slab rates). If the asset is transferred to the wife before marriage, then the income from that asset will not be clubbed with husband's income. Similarly, even if divorce happens, the rule of clubbing will not apply to the assets transferred to each other.
Clubbing of Income of Daughter-in-Law
If you transfer income to your daughter-in-law without any sufficient reason, then the rules of income clubbing apply there too.
For example, You are a shareholder in a company. In a particular year, you got a Dividend of Rs 1 lakh from the company. If you have transferred this Dividend to your daughter-in-law without sufficient reasons, then it will be considered part of your income. Income Tax will be calculated by adding it to your income.
Clubbing of Income Transfer to HUF
In Indian society, many businesses run in the name of a family and not in the name of a single person. In the Income Tax Act, these are named HUF (Hindu Undivided Family). Any HUF, like a person, is also responsible for earning income and paying taxes on it.
If you give any of your asset(s) to HUF and there is no sufficient reason behind it, then the clubbing rule will apply. The income from that property will be considered yours, and you will be responsible for paying taxes on it.
Income of Minor Child (Below 18 years)
If a child below 18 years earns a decent amount, his income will be clubbed with the income of one of his/her parents whose income is higher. However, in some cases, children's earnings are exempt from clubbing-
➤A child earning up to Rs 1500 within a year gets a tax rebate.
➤If the child is disabled, due to which his income is entitled to tax exemption under section 80U. There is no need to club his earnings in the earnings of parents.
➤If the child has earned something due to manual work done by his hand, then it cannot be included in the income of the parent(s) for the purpose of calculation of tax.
➤Similarly, if a small child has won any prize money due to his talent or knowledge, then he is also exempt from tax. However, if the child has any income (interest, etc.) from the gift given by the relatives, then it will be included in the tax calculation.
Rules for earning of adult child (above 18 years)
The income of a person above the age of 18 years cannot be clubbed in the parent's income. His income will be calculated independently. According to the income tax slab, if the tax is made on him, then the responsibility of filing tax also becomes his own.
Transfer of Income without Transfer of Assets.
If you give your property to someone else without transferring it in their name, then the entire income from that property will be treated as your own income and by clubbing it in your income, income tax is collected on it. (And tax liability is created on that earnings according to tax slab).
Clubbing of Income has been enacted with the intent to tax the persons who misrepresent their source of Income.
But tax evasion is illegal and NOT tax avoidance. We can still do some financial and tax planning to save taxes and prevent income from being clubbed under our hands. With proper tax planning and interpretation of the laws, one can avoid the application of the clubbing provisions on his or his dependents income.