Clubbing of Income
In case of individuals, income tax is applicable on the slab system on total income. As the income increases, the applicable tax rate increases. Some taxpayers in higher income slab may tend to divert some portion of their income to minimize tax burden. Therefore to prevent such tax avoidance, clubbing of income provisions have been incorporated.
So, if you are planning to transfer assets or income to another person in order to avoid tax implications, then such transfers could also be taxable in your hands.
Even genuine gifts to friends and family can also attract clubbing provisions under Income Tax Act. So, it is important to have insight knowledge of clubbing provisions to avoid any tax implications or penalties.
Situations where Clubbing provisions attract
As per Income tax Act, following are the situations where income of others will be clubbed in the hands of the taxpayer, even though the income is not earned/ received by him/her directly.
1. Transfer of income without transfer of assets
If a person transfers income earned from an asset owned by him to another person without transferring such asset, then the transferred income is taxable in the hands of transferor.
Eg- If Mr. Gupta owns a house property and he is transferring the rental income to his family without transferring house property, then rental income is taxable in hands of Mr. Gupta.
2. Revocable transfer of assets
All income arising (part or whole) to any person by virtue of a revocable transfer of assets is to be included in the total income of the transferor.
*Revocable transfer generally means a transfer in which the transferor directly or indirectly exercises control/right over the asset transferred or over the income from the asset.
3. Clubbing of income of spouse
(a) Remuneration/Salary paid to Spouse:
If an individual alone or along with his relatives has substantial interest in any concern and the spouse of the individual is employed in such concern without any technical or professional knowledge, then the salary paid to spouse is taxable in the hands of individual.
However, if the spouse possesses technical or professional knowledge, then the income is attributable in his/her hands only.
*Substantial interest means ,in case of a company, beneficiary who holds 20% or more of the equity shares and in case of any other concern, beneficiary who is entitled to 20% of profit.
(b) Income from asset transferred to spouse for inadequate consideration
(i) Transfer of any asset except house property- If asset is transferred for an inadequate consideration, then income from such asset will be clubbed with the income of the individual.
(ii) Transfer of house property- In case of transfer of house property without adequate consideration, then the transferor shall be the deemed owner and its annual value will be taxed in his hands.
(iii) Transferred asset invested in business- In case, transferred assets are invested in the business by the spouse, then proportionate income from such investment is to be included in the total income of the individual (transferor). Provided such investment is to be taken into accounts on the first day of the previous year.
4. Clubbing of Income of Son’s wife
In case of transfer of asset to son’s wife for inadequate consideration, income from such asset will be clubbed with the income of the individual i.e. transferor being mother-in-law or father-in-law.
5. Clubbing of income of Minor Child
Income of minor child is to be clubbed with the income of that parent whose income is higher. Such individual (parent) can claim an exemption of Rs. 1,500 or income of minor so clubbed, whichever is less.
(i) Income of minor child from 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.
(ii) Income of a minor suffering from disability will not be clubbed with the income of his/her parent.
(iii) In case of transfer of house property to married minor daughter, any income generated by house property would not be taxable in hands of parents.
6. Clubbing of income from HUF property
In case where HUF member transfers his individual property to HUF for inadequate consideration or converts such property into HUF property, then Income from such converted property shall be clubbed in the hands of individual (HUF member).
Cross transfers are transfers which are connected by agreement so as to form part of a single transaction & each transfer constitutes consideration for the other. In such a case income shall be clubbed in the hands of deemed transferor.
Let us understand the concept of cross transfer through the following example-
Suppose A makes a gift to wife of his brother B of Rs. 50000 and a simultaneous gift is made by B to A’s minor son of shares of Rs. 50000 in a company. Such a transfer is known as cross transfer which is made to avoid tax implications between two parties. These transfers are actually considered as a single transaction between A and B.
However, as per income tax act, cross transfers are also taxable in the hands of transferors.
In the given example, any income arising from shares of minor son shall be taxable in the hands of A and income arising from house property to Mrs. B should be included in the hands of B.
CA Palak S Jain
CMO, Financial Analyst
Expertbells Consulting Private Limited