Introduction-
Clubbing of Income under Income Tax Act means income of other person is included in assessee's total income
1. Income of minor child (less than 18 years old) under section 64 (1A) -
Any income of minor child will be clubbed under the income of his parents either father or mother whose income is greater. If you included an income of your minor child, then you can claim exemption under section 10(32) up to Rs. 1,500 for each child or actual income clubbed whichever is lower.
For Example:
If a minor child earns interest income of Rs. 25,000 per annum. His mother’s income is Rs. 2,00,000 and his father’s income is Rs. 2,50,000. What is the clubbing provision?
Answer:
Income of minor child will be clubbed with the income of either of parents whose income is greater. Here Rs. 25,000 will be clubbed with the income of his father. His father can claim deduction under section 10(32) for Rs. 1,500
In case of divorced parents:
The income of minor child will be added in income of parents, who is caring a child.
In case of parents not alive:
The income of minor child will not be added in income of anyone. In that case guardian of child can file his return individually.
There are some exceptions when provision for clubbing of income is not applicable.
- If the minor child has earned an income because of his own manual work, or used his talent or specialized knowledge & experience. He has to file his return individually and pay tax thereon himself.
- In case of a minor who is disabled (Disability defined under section 80U) and earns an income.
2. Income of major child-
Any income of major child will not be clubbed in the income of his parents.
For example:
If a person has paid Rs. 2,00,000 to his major child and he has invested the said amount and earns an interest income of Rs. 15,000. What is the clubbing provision?
Answer:
Here provision of clubbing of Income is not applicable as the child is major. Hence the interest income of Rs. 15,000 is taxable in hands of the child not his parents.
3. Income of son’s wife (Transfer an asset)-
If an asset is transferred directly or indirectly his son's wife, without adequate consideration then the income generated from this asset will be clubbed in that person's income.
Or
If you have transferred an assets to a person or AOP directly or indirectly, without adequate consideration, for the benefits of his son’s wife then the income generated from this assets will be clubbed in that person's income.
4 Clubbing of Income of Spouse-
A. Transfer of an assets (other than house property)-
If an asset is transferred directly or indirectly to his spouse without adequate consideration (the transfer must not be in connection with an agreement of divorce settlement or with adequate consideration) then the income generated from this asset will be clubbed in his income.
Or
If you have transferred an assets to a person or AOP directly or indirectly, without adequate consideration, for the benefits of his spouse then the income generated from this assets will be clubbed in his income.
B. Transfer other than asset-
If you have transferred an amount to your wife (non working) and she has invested that amount in investment plans and earns interest income from that, the income earned will be clubbed in your income only but if she has further invest this income in another saving plan, the income generated out of that income will not be clubbed in your income.
Transferred a house property is covered under section 27 (1) of Income Tax Act as below:
If Mr. Ram transferred his house property to his wife without adequate consideration, then in such a case, even though the property belongs to his wife, the deemed owner of property is Mr. Ram. In future, if his wife sells the property, then the capital gain arising from sale of such property is the income of Mr. Ram and not of his wife.
However, not cover the cases where the property is transferred to a spouse in connection with an agreement to live apart.
Suppose if Mr. Ram has transferred Rs.35 lakh to his wife. In return, his wife purchased a flat. The ownership, in this case, is with his wife. However, any rental income or capital gains from this property is the income of Mr. Ram (while the ownership is with his wife and a Sec.27(1) rule not applies).
C. Remuneration/commission Received
If your spouse is getting any salary, commission, fees or remuneration from a concern in which you have substantial interest then provision of clubbing of income is applicable to the spouse whose income is greater. Except if spouse receives this salary due to his/her professional/technical knowledge & experience then provision of clubbing of income is not applicable. It will be taxable in hands of person receiving it.
*Substantial Interest means: An individual is deemed to have substantial interest if he beneficially holds shareholding not less than 20% of voting powers either individually or jointly with relatives, in case of a company or is entitled to not less than 20% of the profits either individually or jointly with relatives in case of other than company, at any time during the previous year.
5. Transfer of income without transfer of Asset:
If any person transfers income without transferring the ownership of the asset, such income will be clubbed in the income of the transferor.
6. Revocable transfer of Asset:
If any person transfers any asset to any other person in such form and condition that such transfer is revocable at any time during the lifetime of the transferee, the income earned through such asset will be clubbed in the income of the transferor.