Income tax: Know the rules of clubbing income

The clubbing of income in the Income Tax Act means to include the income of another person in the taxpayer’s total income. If a person diverts any income source to another person’s name, he cannot free himself from paying taxes on such income. If he does so, he has to club the income derived from the transferred asset in his total income and pay tax on it. 

The clubbing provision is not applicable in all cases, but it is applicable in certain specified cases. Let us see where the clubbing provision applies. 

Transfer of income without transfer of assets

Suppose you own a property and have given the property on rent at Rs 10,000 to your friend. Further, you have directed the tenant to pay the whole amount of rent to your friend. In this case, you have transferred the income to your friend without transferring him the asset. In such cases, the income tax on such rent income shall be paid by you and not by your friend. 

Income from assets transferred to spouse/daughter-in-law

If a person transfers the asset to their spouse without consideration, the income generated from such asset shall be taxable to the person who transfers the asset. The asset also includes money.

So if a person transfers Rs 10 lakh to his spouse and the spouse invests the money, say in fixed deposits, the income generated from such fixed deposits is taxable in the hands of the person who has transferred the money(transferor) and not in the hands of the spouse. It is irrespective of whose name the fixed deposits are. The transaction of transferring money to the spouse will not attract tax, but the income generated from investing such money will attract tax in the hands of the transferor.

Similarly, suppose any person transfers any asset to their son’s wife (daughter-in-law) name without adequate consideration. In that case, the income from such an asset will be clubbed in the hands of the transferor.

Clubbing provisions not applicable

One should note that no clubbing provision will apply if adequate consideration is paid to the transferor by the transferee. Additionally, the relationship of husband and wife should exist both at the time of transfer of money/property and accrual of income to attract clubbing provisions. For example, no clubbing of income is required if money is transferred before marriage and income is accrued after marriage. In such cases, the income accrued will be taxable in the hands of the person to whom the asset was transferred. Similarly, if there is no husband-wife relationship on the date of accrual of income (for example, divorce), the income will not be clubbed in the hands of the transferor. 

Minor child’s income

The income of a minor child is clubbed with the income of their parents. The parent who clubs the income can claim an exemption of Rs 1,500 as per the Income Tax Act. However, the clubbing provisions will not apply if the income is earned by the minor child’s skills, knowledge, and experience.

Hence, it is necessary to comply with the income tax law and disclose all the income, including the income from clubbing, while filing the income tax return. 

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For any clarifications/feedback on the topic, please contact the writer at  namita.shah@cleartax.in