There are a variety of situations in which you may need to combine someone else’s money with your own. Hold off on transferring any of your assets or income to another individual as a tax planning strategy to prevent having the income taxed in your hands. Clubbing provisions may be attracted as a result of such transfers to the income tax legislation of India.
Even sincere gifts to family and friends may result in income tax consequences. If you learn more about the Indian income tax law’s clubbing rules, it will be quite beneficial to you. As a result, let us take a closer look at these clauses.
Clubbing of income
The word “clubbing of income” refers to adding or combining the income of another person (usually a family member) to one’s own. Section 64 of the IT Act allows for this. To prevent this activity, however, certain limits pertaining to specific people and scenarios are required.
Specified persons to club income
While computing the total income of an individual, the income of any and every person cannot be randomly combined, nor can all income of a specific person be combined. Only certain specified incomes of specified persons can be combined when computing the total income of an individual, according to Section 64.
Specified scenarios when you can club income
|Section||Specified person||Specified scenario||Income to be clubbed|
|Section 60||Any person||Transferring money without transferring assets, whether through a contract or otherwise||Any income from such an asset will be pooled in the transferor’s hands.|
|Section 61||Any person||Transferring an asset with the possibility of revocation.||Any income from such an asset will be pooled in the transferor’s hands.|
|Section 64(1A)||Minor child||Any money derived from or accruing to your minor child, including both stepchildren and adopted children. Even minor married daughters are subject to clubbing restrictions.||Income will be pooled in the hands of the parent who earns more.|
Note: If the kid’s parents’ marriage does not last, the income of the parent who is responsible for the minor child in the preceding year will be combined. If a parent’s income is combined with that of a minor child, the parent is entitled to Rs. 1,500 exemption.Exceptions to the clubbing of a disabled child’s income (disability of the nature specified in section 80U)Earnings from the child’s manual labor or activities requiring the application of his skill, talent, or specialized knowledge and experience
A significant child’s earnings. This would also include earnings from investments made with funds given to the adult kid as a gift. Money given to an adult child is also excluded from gift tax if it is given to a relative.’
|Section 64(1)(ii)||Spouse**||If your spouse receives any income from any firm in which you have a substantial interest*, regardless of its nomenclature, such as salary, commission, fees, or any other form and through any means, i.e., cash or in-kind,||The income of the taxpayer or spouse whose income is higher is combined (before clubbing). The exception to clubbing: If the spouse has technical or professional qualifications in regard to any income derived by the spouse, and that income is solely attributable to the application of his or her technical or professional knowledge and expertise, clubbing is not attracted.|
|Section 64(1)(iv)||Spouse**||You have made a direct or indirect transfer of assets to your spouse for insufficient consideration.||The income from such an asset is pooled in the transferor’s hands. If the asset isn’t a house, of course.|
There are certain exceptions to the clubbing rule. In the following situations, there is no revenue pooling:
a. When an asset is distributed as part of a divorce settlement
b. If the property is transferred prior to marriage
c. There is no husband and wife relationship on the date of income accrual.
d. The spouse purchases an asset with pin money (i.e. an allowance given to the wife by her husband for her personal and usual household expenses)
|64(1)(vi)||Daughter-in-law||Transfer of assets to your daughter-in-law, either directly or indirectly, for insufficient consideration||Any revenue generated by the transfer of such assets is pooled in the hands of the transferor.|
|64(1)(vii)||Any person or association of person||Transferring any assets, whether directly or indirectly, for an insufficient compensation to any individual or group of people to benefit your daughter-in-law, either immediately or in the future.||The revenue from these assets will be counted as your income and will be accumulated in your hands.|
|64(1)(viii)||Any person or association of person||Transferring any assets, whether directly or indirectly, for an insufficient compensation to any individual or group of people to benefit your spouse, either immediately or in the future.||The revenue from these assets will be counted as your income and will be accumulated in your hands.|
|Section 64(2)||Hindu Undivided Family||In the event that a HUF member transfers or converts his or her personal property to HUF for insufficient compensation,||The income from such converted property will be pooled and distributed to individuals.|
* If a person has a large interest in a problem, he or she is said to have a substantial interest in the problem. –
- In the case of a corporation, an individual beneficially possesses shares with a voting power of 20% or more, either alone or with relatives (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits)
- In any other scenario, such individual is entitled to 20% or more of the earnings in the aggregate of such company at any time during the previous year, either alone or with his relative(s).
**In the hands of a person, income from a spouse’s reinvestment of clubbed income is not clubbed.
Mr. X has a store that rents for Rs.12,000 per month. He transfers the shop’s ownership to his acquaintance Mr. Y while keeping the rent.
Mr. X has moved the income without transferring the asset in this example. As a result, Mr. X must include the rental income when calculating his total income under section 60 of the income tax act.
Mr. A owns beneficially 21 percent of PTK Pvt. Ltd.’s equity shares. Mrs. Jay works for PTK Pvt. Ltd. as a financial manager. Mrs. B Pvt. Ltd. pays her a monthly salary of Rs. 40,000. Mrs. Jay has no financial qualifications, expertise, or knowledge.
With a 21 percent shareholding in PTK Pvt. Ltd., Mr. Aowns a significant stake in the company. Mrs. B, on the other hand, is employed despite having no financial qualifications or technical knowledge. As a result, Mrs. A’s salary or payment from PTK Pvt. Ltd. will be combined with Mr. A’s income under section 64(1)(ii) of the Income Tax Act.
In the example above, if Mrs. A possessed the qualifications and experience for the finance manager position at PTK Pvt. ltd., her earnings would not be included in Mr. A earnings.
Mr. M has given his wife Rs. 6,00,000 as a gift. Mrs. N then put the same amount of money into a fixed deposit. Mrs. N receives 5,000 p.a. in interest on such a fixed deposit.
Mr. M transferred Cash (asset) without proper consideration, and Mrs. N changed it into another asset. As a result, interest of Rs. 5,000 earned on the converted asset (fixed deposit) will be included in Mr. M’s income under section 64(1)(iv) of the income tax act.
- If Mr. M transfers the money as part of a divorce settlement, the clubbing requirements will not apply.
- In addition, no income shall be clubbed in Mr. M’s hands if the cash was transferred before marriage and interest are collected after marriage.
As a result, the husband-wife connection should be maintained both at the time of asset transfer and at the time of income accrual.
Things To Remember
- The clubbing rule applies to both income and loss.
- Capital gain on a subsequent transfer of the asset by the transferee is deemed income and is included in the transferor’s income.
- In the hands of the transferor, the income derived from the transformed form of the asset must be combined.
- If just part of the consideration is payable or paid, the transferor will only receive the insufficient consideration.
- The regulations relating to clubbing will not apply to income obtained from clubbed income.
For example, suppose a bond is transferred for Rs. 5 lakh to the spouse or daughter-in-law without reasonable compensation, and the transferor receives interest of Rs. 20,000 on the bond. However, if the spouse or daughter-in-law gets any further income from the Rs. 20,000 in interest, no clubbing requirements apply to that income.
- The clubbing provisions will also apply to cross-transfers and indirect transfers.
For example: If Mr. H gives Mrs. G a payment of Rs. 8,000 and Mr. G gives Mrs. J an amount of Rs. 15,000 Assume that both presents were given without thought. The overlapping sum of Rs. 8,000 will thereafter be combined in the transferors’ hands.
Read, also: Minority Interest