The income tax laws have certain provisions for clubbing of income with the income of the person other than the person who has earned the income. This article will discuss the provisions applicable to individual taxpayers.
Concept of clubbing under the income tax laws
When income is included in the hands of someone else instead of it being taxed in the hand of the person who actually receives it, this is called clubbing of income under the income tax laws. Let us see the various situations where clubbing provisions apply.
Income on assets gifted by members to the HUF
The gifts received by a person are treated as income of the recipient if the aggregate of all gifts exceeds threshold of fifty thousand rupees in a year but gifts received from certain specified relatives are excluded from such provisions. For this purpose, all the members of the HUF are treated as HUF’s specified relatives and therefore there is no tax implication for HUF in respect of gifts received by it from its members irrespective of the value of the gifts.
Though the transaction of gifts from members by an HUF is not subject to tax but any income which arises to the HUF is required to be included in the income of the member who had gifted such asset. The clubbing provisions will continue to apply as long as the HUF exists. In case the HUF is fully partitioned, the clubbing provisions will continue to apply in respect of the share of asset received by spouse of such member.
Income to spouse or daughter in law on assets gifted
Gifts received by a daughter in law from her in parents in laws and spouse from other spouse are also not treated as income under income tax laws as your spouse and parents in law are also covered within the definition of specified relative.
However, any income arising on the asset transferred to your spouse or daughter in law, is required to be clubbed with your income as long as the relationship subsists. Please note that the clubbing provisions come into play after the marriage and not before that. So in case you make gift of any asset of your fiancé or would be daughter in law before such marriage, the same would not be subjected to clubbing provisions.
Income under transfer of assets under revocable transfer or transfer of income without transfer of the asset
When a person transfers income of an asset without actually transferring ownership of the asset to the beneficiary, income so received by the beneficiary is required to be included in the income of the actual owner of the assets.
Likewise, when a person transfers any asset under a revocable transfer i.e. when the transfer can be revoked by him any time, the clubbing provisions will apply to income arising on asset so transferred. Any transfer which is not revocable during the life time of the beneficiary is not revocable is outside the scope of clubbing provision.
However, clubbing will not apply in case of a transfer made to a trust for the benefit of a person/s and which is irrevocable during the life time of the beneficiaries.
In all the cases where the clubbing provisions apply consequent to transfer of any asset/income, it is important to note that the clubbing provisions will apply only in respect of the income which arises from the asset so transferred and will not apply in respect of investments made from income already clubbed. Moreover, the clubbing provisions will apply whether the asset is transferred directly or indirectly. The clubbing provisions will continue to apply even when the asset transferred is converted into any other asset.
In case the amount gifted is invested in a product where income is tax free like tax free bonds, PPF etc. though such income is tax free but still will have to be included in the income of the transferor but will not have any tax impact due as the income being tax free.
Passive income arising to minor children
All the income except the income earned by the minor with his own skill, talent or labour is required to be included in the income of the parent who has higher income. The clubbing provision do not apply in respect of a minor child who is differently abled. There is an exemption of Rs 1500/- in respect of each minor child on the income clubbed in the hands of the parents.
The clubbing of minor’s income in income of a particular parent shall continue year after year even if income of such parent becomes lower than the other parent. However, the assessing officer can direct that the income of the minor shall be included in the income of the parent other than the parent in whose income it has been clubbed hitherto.
In case of separation between the parents, the income will be clubbed with the income of the parent who maintains such minor child. The clubbing provisions will cease from the year in which the minor becomes a major.
Income arising to your spouse from concerns where you have substantial interest
In addition to income arising to your spouse from transfer of any asset, any income arising to your spouse, by way of salary, commission, fee or any other remuneration from a concern in which you have either voting rights or beneficial interest of 20% or more is also subject to clubbing provisions.
However, in case the income is earned by the spouse due to application of his/her technical knowledge or professional qualification the clubbing provisions will not apply. So in case of partnership firm of professionals where both the spouses are partner the income of each of the spouse will be taxed in their hands.
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