1. Clubbing of Income in General
Transfer of Income without Asset Transfer:
- Explanation: If you transfer the income generated from an asset to someone else without transferring the ownership of the asset itself, the Income Tax Act considers that income as still belonging to you.
- Example: Suppose you own a house property and the rental income from that property is directly deposited into your spouse’s bank account. Even though the income goes to your spouse, since you own the property, this rental income will be added to your total income and taxed accordingly.
Revocable Transfer of Assets:
- Explanation: When you transfer ownership of an asset to someone else but the transfer can be revoked by you, the income derived from that asset continues to be taxed as your own income.
- Example: You gift shares of a company to your sibling, but include a condition in the gift deed that allows you to reclaim the shares at any time. Any dividends or capital gains arising from these shares will be taxed as your income because you retain control over the ownership.
2. Clubbing of Spouse’s Income
Salary from a Firm with Substantial Interest:
- Explanation: If your spouse receives a salary from a company or firm in which you have a substantial interest, that salary is treated as your income for tax purposes.
- Substantial Interest Definition:You have a substantial interest if you directly or indirectly hold:
- 20% or more of the equity shares in the company, or
- 20% or more of the voting power in the company, or
- You are entitled to 20% or more of the profits of the firm.
- Exception: If the salary is received by your spouse due to their own technical or professional qualifications, and not because of your interest in the company or firm, then it is taxed in your spouse’s hands.
Transfer of Assets to Spouse without Adequate Consideration:
- Explanation: If you transfer an asset directly or indirectly to your spouse without receiving adequate consideration, the income derived from that asset will be clubbed with your income.
- Example: You gift a residential property to your spouse for a nominal consideration much lower than its fair market value. Any rental income or capital gains from this property will be added to your total income for taxation purposes.
3. Clubbing of Income of Minor Child
Investments in Minor Child’s Name:
- Explanation: Income generated from investments made in the name of a minor child (below 18 years) is taxed as the income of the parent whose total income is higher.
- Exceptions: Income generated from:
- Any activity involving the minor’s own manual work, or
- Using the minor’s talent or specialized knowledge and experience, or
- If the minor is disabled as per the definition under Section 80U of the Income Tax Act,
- will not be clubbed with the parent’s income.
Exemption Limit: Up to Rs. 1,500 per minor child per year is exempted from clubbing provisions.
4. Clubbing of Income of Son’s Wife
Transfer of Assets to Son’s Wife:
- Explanation: If you transfer an asset directly or indirectly to your son’s wife without adequate consideration, any income derived from that asset will be clubbed with your income.
- Example: You transfer shares of a company to your son’s wife for no consideration. Dividends received from these shares will be considered as your income.
5. Clubbing of Income of Major Child
Investments by Major Child:
- Explanation: Any income generated from investments made by your major child (aged 18 or above) using money gifted by you will not be taxed in your hands. It will be taxed in the hands of the major child.
- Example: You gift a substantial amount to your adult child who invests it in mutual funds. Any dividends or capital gains from these investments will be taxed as income of your adult child, not yours.
Key Points to Note:
- Purpose: The clubbing provisions aim to prevent tax evasion by taxing income that is effectively controlled or transferred within families.
- Exceptions: Certain incomes like those from independent work by minors or income earned by disabled minors are exempt from clubbing.
- Tax Liability: Income clubbed is added to the taxpayer’s total income and taxed at applicable rates.
Understanding these provisions is crucial for tax planning within families to ensure compliance with tax laws and optimize tax efficiency.