Clubbing of Income: Understanding Section 60 to 64 of the Income Tax Act
We have a progressive tax system in India, which means that your taxes grow by the applicable income tax bracket as your income rises. Many people transfer assets or set up income streams in the names of their spouses, kids, parents, and other relatives to reduce their income to avoid paying excessive taxes. The income tax introduced a "clubbing of income" provision under sections 60 to 64 of the income tax statute to stop such tax avoidance techniques. In this article, we will break down and thoroughly go over each of the Clubbing of Income guidelines today.
Table of Content
Clubbing of Income in Income Tax
Clubbing of Income refers to the practice of including another person's income into your own and having it subject to your taxes. Deemed income is the income that is included in your overall income. Only individuals are subject to the clubbing of income requirements; it does not apply to firms, HUFs, companies, and other assessees. Assume that your total revenue is Rs 3,00,000. It consists of Rs. 1,00,000 in rental revenue and Rs. 2,00,000 in salary income. You transfer rental revenue without putting the house in your wife's name, hoping to come in under the basic exemption limit. Your taxable income will now be calculated at Rs 3,00,000 rather than Rs 2,00,000 for tax purposes. This is as a result of the income tax laws. Here are the sections that cover the clubbing of income under the Income Tax Act:
Section 60: Transfer of income without transfer of asset
Section 61: Revocable transfer of asset
Section 64(1)(ii),64(1)(iv),64(1)(vii): Clubbing of spousal income
Section 64(1)(vi),64(1)(viii): Clubbing of income in case of son’s wife
Section 64(1A): Clubbing of income of a minor child
Section 64(2): Clubbing of Income & HUF
Clubbing Provisions: Applicability of Clubbing of Income in Various Circumstances
The Clubbing of Income rule is applicable in a variety of contexts. Let's talk about each of them individually.
Section 60: Transfer of Income without Transfer of Asset
The revenue is subject to taxation in the hands of the transferor when it is transferred without the ownership of the asset that generated the revenue being transferred as well. The most common instance of this is when a property owner requests that a renter pay the rent in the name of their parents, spouses, or children.
Let us illustrate using a straightforward example: X receives Rs 20,000 per month in rental income from his Delhi home. However, he requested that his tenant deposit rental payments into his wife's bank account in order to avoid paying taxes. In this instance, even when the money is deposited into the wife's account, X will be taxed on it because he moved the source of income without changing the house's legal ownership. When doing their taxes, people frequently make this error. Thus, the next time, don't forget to transfer the asset's legal ownership before transferring the revenue. You can prevent such errors and undertake proper tax preparation.
Section 61: Revocable Transfer of Asset
A clause allowing the transferor to reclaim ownership of the item at any moment after it has been transferred to the recipient is kept in the transaction. It is known as a Revocable Transfer in this scenario. Any income from an asset that is transferred in a "revocable manner" is subject to taxation in the transferor's hands under the terms of the Clubbing of Income.
taxFor example, A gave B ownership of his house. The deal stipulates that after two years, A will receive back ownership of the asset. According to the clubbing of income, any income that B receives from this house during the next two years will only be included in A's income. We now understand the fundamental rules of clubbing of income. Let's go deeper and talk about clubbing of income in the context of the husband, son's wife, little child, and HUF.
Section 64(1)(ii), 64(1)(iv), 64(1)(vii): Clubbing of Income of Spouse
The simplest method of avoiding taxes is, as the saying goes, to shift income into your spouse's name. To control such transactions, there are extremely specific provisions in place. Below is a discussion of each of the several scenarios.
Case 1- Your spouse works for a company or organisation in which you have a sizable stake. This situation has two components, which are covered below.
Case 2- If both you and your spouse get compensation from a company and have a significant stake in that company, your combined compensation will be combined into the hands of the spouse whose income does not include that compensation the most. However, the consensus is that the clubbing provisions do not apply if both spouses are being paid for their professional skills. Substantial interest is defined as having the right, at any point in the year, to not less than 20% of a company's voting power (in the case of a company) or 20% or more of the firm's profits.
Case 3- If you gave your wife any assets without giving them any thought. Transferring an income-generating item into the name of one's spouse to avoid paying taxes is a relatively prevalent practice. These new regulations aim to stop these kinds of tax evasion schemes. Income from these assets will thereafter be subject to taxation in your situation. This income clubbing clause will not be applicable if the asset is transferred for sufficient value, as a condition of a divorce, or moved before marriage.
Case 4- Occasionally, a transferred present that was previously exempt from taxes is further invested in a source such that it begins to generate income. The rules of section 64(1)(iv) apply in all such cases where the transferee spouse modifies the asset's character, resulting in income clubbing.
For example, Mr. X gave his spouse a present of Rs. 5,00,000. This sum is invested by the wife in an FD, where interest is immediately earned. Will Mr. X be required to pay taxes on this interest income? A gift of Rs 5,00,000 to a relative won't be subject to taxes because of this. However, Mr. X will be subject to taxation on the interest received on the FD in accordance with section 64(1)(iv). The clubbing provisions will apply as the transferee, Mrs. X, has altered the form of the asset being transferred.
Case 5- Any asset transferred to a third party or AOP must have been done so with no consideration at all or with insufficient consideration in order to eventually benefit your spouse, either now or in the future. The clubbing provisions will also apply to this kind of asset route, which delays the benefit of the assets to your spouse.
Section 64(1)(vi),64(1)(viii): Clubbing of Income in case of Son’s Wife
If you transfer any money to your daughter-in-law, the clubbing of income provisions also takes effect. We talk about the situation below. Without due deliberation, the asset was passed to your daughter-in-law. If this is the case, any income you get from that asset will be subject to taxation. For instance, you have 10,000 10% Debentures, each worth Rs 100, that you have given to your daughter-in-law without any thought. The interest income of Rs. one million will now be included in your taxes.
In another scenario, to eventually postpone the asset's benefits to your daughter-in-law, it has been transferred to another individual or AOP. When such transactions are made carelessly to shift the burden of income tax to third parties, the Income Tax Department keeps a careful eye on them and adds the proceeds back to your income by the clubbing of income rules.
Section 64(1A): Clubbing of Income of Minor Child (Less than 18 years)
Any money received by a minor kid is combined and given to one or both of his or her parents, whose income (without including the income from minor children) is higher. For instance, the interest on a fixed deposit made in a minor child's name will be combined with the parent who makes the most money. Nonetheless, the clubbing of income provisions will not apply in some circumstances, as per Income Tax provisions. These are:
When a minor kid has any of the disabilities listed in Section 80U
When a minor child works manual labour to earn money;
The minor child's earnings are from skills, talents, education, etc. For instance, a young child wins money on television programmes such as Voice India Kids and Indian Idol Junior.
Additionally, under Section 10 (32) each minor child's income is exempted up to Rs. 1500 for the parent to whom the minor's income is clubbed. Remember to apply for this exemption.
Frequently, people inquire about the money that their major child makes. In this kind of situation, no specific clause is required. Major children are subject to the same rules that apply to adults up to the age of sixty. Therefore, your significant child must file an income tax return if his income exceeds Rs 2,50,000 (before any deductions). There must be no clubbing of income provisions. It could happen that the child was a minor in the same fiscal year that they became a major. Income in this situation would be pooled until the child was a minor, not for the remainder of the year.
Section 64(2): Clubbing of Income & HUF
The Hindu Undivided Family has been around for a very long time. Rules about income taxes also acknowledge HUF as an assessee. To put it plainly, a HUF must file an income tax return. Therefore, it follows that in the case of HUF, clubbing of income provision is also attracted. Any income derived from personal assets that were transferred to the HUF without proper consideration will be subject to personal taxation. The dispersed property in your spouse's possession will be combined with your income in the event of a future HUF split. For instance, you have a residence that generates Rs 5,00,000 in rental income annually. The entire Rs 5,00,000 in income will be subject to taxation in your name alone if you transfer this house to the HUF without giving it proper or sufficient thought.
Conversion of Self-acquired Property into Joint Ownership
When a person's self-acquired property is converted into joint family property without sufficient consideration, the income the joint family makes from that property is included in the overall income that the joint family is responsible for. The income from such property will be included in the total income of the individual if a member of the HUF:
Converts their separate property to the HUF
Integrates the property into the family's common stock
Transfers their individual property to the family without receiving sufficient consideration
This inclusion guarantees that any revenue recognised in the applicable tax assessments from the conversion or transfer of self-acquired property into joint family property.
Non-Applicability of Clubbing of Income
Income transferred before marriage: The clubbing restrictions do not apply to any asset or gift that is given to the prospective wife prior to the wedding. Given that the husband and wife should have a connection at the time of both the transfer of assets and the accrual of income.
Income from clubbed income: Any additional income from the income created will not be clubbed, unless the asset is passed to a spouse or daughter-in-law (the son's wife), in the case of a minor.
Money saved by the wife from money donated to support daily or household costs is not deemed an asset transfer and will not be covered by the clubbing rules.
Filing ITR in case of Clubbing of Income
If the clubbed income consists of interest or prizes from games, puzzles, lotteries, or other similar sources, it will be classified as income from other sources; otherwise, it will be taxed as income from house property. Similarly, the head of clubbed revenue will always be the same as its generation source. Clubbing rules, however, will have an impact on how you calculate your income and file your return.
For example, Mr. Z makes Rs 6,00,000 in salary. His child Y enjoys playing lotto games with him. Super One day, Y earned Rs 2,00,000. Y’s income will be combined with Mr. Z's because he is a minor. Mr. Z must now submit form ITR 2 for his return. He would have filed an ITR 1 Form if his underage kid had not received any "lottery income." The main idea is that the ITR Form will change based on the type of revenue to be combined. Thus, please remember this the next time you select your ITR Form.
Conclusion
When not fully understood, the idea of clubbing of income can be highly technical and perplexing. Any tax-saving method you use without the appropriate advice or assistance could land you in legal hassles and result in fines. You must seek expert advice to deal with this concern and save yourself from trouble.
FAQ
Q1. What is the meaning of clubbing of income?
Clubbing of income refers to the practice of combining another person's income with the taxpayer's own. Typically, an individual is subject to taxation solely on their income. However, there are some unique situations when a taxpayer's taxable income includes (or is "clubbed") the income of another person. In these situations, the taxpayer is responsible for paying taxes on both his income (if any) and the income of the other person.
Q2. What is deemed income in income tax?
In terms of income tax law, deemed income is the term used to describe income that is not actually received by the taxpayer but is nevertheless subject to income tax in specific situations. Even though the taxpayer did not receive this revenue, it is nonetheless considered to have been received.
Q3. What is the disadvantage of clubbing of income of husband and wife?
The primary drawback of combining a husband and wife's income is that it increases their tax burden as their combined income is subject to single taxation. As a result, as the tax slab rate increases, so do the exemptions and deductions.
Q4. How is it possible to prevent clubbing of income of husband and wife?
Both the husband and the wife need to arrange their tax affairs so that their incomes are not combined.
Q5. How can I indicate income clubbing in my ITR?
When completing an ITR, you must include both your income and the income to be clubbed, according to the ITR Forms. Additionally, a relevant timetable must be sent.
Q6. Are there specific scenarios where income clubbing doesn't apply?
Yes, certain scenarios exist where income clubbing may not apply. TaxBuddy can help identify such exceptions and provide tailored advice.
Q7. How does the clubbing of income affect tax planning for joint property owners?
Income clubbing can significantly impact tax planning for joint property owners. TaxBuddy can provide insights on navigating this scenario effectively.
Q8. Can income clubbing impact tax liabilities in cases of gifts and transfers?
Absolutely, income clubbing rules apply to gifts and transfers. TaxBuddy can explain the implications and assist in managing tax liabilities.
Q9. What strategies can individuals employ to legally avoid income clubbing?
TaxBuddy specializes in suggesting legal strategies to help individuals avoid or minimize the impact of income clubbing within the bounds of tax regulations.
Q10. Are there exemptions or thresholds for income clubbing in family businesses?
Family businesses may have specific exemptions or thresholds. TaxBuddy can guide you on understanding and navigating income clubbing in family businesses.
Q11. How does income clubbing differ in the context of minor children and their investments?
Income clubbing rules for minor children and their investments have nuances. TaxBuddy can provide detailed insights into these differences.
Q12. Can TaxBuddy provide guidance on potential pitfalls related to income clubbing?
Certainly, TaxBuddy can offer guidance on potential pitfalls associated with income clubbing, ensuring you make informed decisions.
Q13. How much can be given to a wife without incurring taxes?
Regardless of the value, there is no tax associated with gifting your wife a present.
Q14. Are there any clubbing procedures in place if an asset is transferred but income is not?
The revenue from such an asset is taxed in the hands of the transferor, or the person transferring the income, whenever someone transfers their income from an asset they own without also transferring the asset from which the income is earned. The following conditions apply:
An asset is owned by the taxpayer
He does not transfer the asset's ownership
A settlement or agreement transfers the asset's revenue to any individual
Q15. Is it permitted to club losses?
Income includes losses according to the Income Tax Act's clubbing rules. If income is clubbed, then losses are clubbed as well, even if clubbing losses will reduce the amount of taxes due.
Q16. When the income of a minor is combined with yours, how is TDS handled?
In order to claim tax deductions in the name of the parent whose child's income is being clubbed, parents may provide a declaration to the bank under rule 37BA(2). Furthermore, there is a claim for this TDS option on the ITR form. As a result, in any situation where the minor's income is clubbed, the parent may be entitled to TDS.
