What is Clubbing of Income?
Clubbing of income means Income of other person included in assessee's total income, for example: Income of husband which is shown to be the income of his wife is clubbed in the income of Husband and is taxable in the hands of the husband. Income of a minor child is taxable in the hands of his parents.
Under the Income Tax Act a person has to pay taxes on his income. A person cannot transfer his incomeor an asset which is his one of source of his income to some other person or in other words we can say that a person cannot divert his income to any other person and says that it is not his income. If he do so the income shown to be earned by any other person is included in the assessee's total income and the assessee has to pay tax on it.
For example: Mr . X purchased a residential apartment in the name of his wife Ms. Y. X let out this apartment. The rental income earned by X in name of his wife Y is taxable in the hands of X
1) Income of a minor child
All income which arises to the minor shall be clubbed in the income of his parents. Income will be included in the income of that parent whose total income is greater. This case has two exceptions. (1) Income of minor child suffering from specified disability. (2) Income of minor child on account of manual work or involving application of his skill/talent etc.
2) Remuneration to Spouse
An individual is chargeable to tax in respect of any remuneration received by the spouse from a concern in which the individual has substantial interest. This provision has an exception. If the remuneration is received by spouse by the application of technical or professional knowledge or experience clubbing provisions will not take place. For example, X has substantial interest in A ltd. and Mrs. X is employed by A ltd. without any technical or professional qualification. In this case salary income of Mrs. X shall be taxable in the hands of X.
3) Transfer of income without transfer of Asset
If any person transfers income without transferring the ownership of the asset, such income will be taxable in the hands of the transferor. Eg. A owns 15,000, 10% NCD of XYZ Ltd., he transfers interest income to his friend B without transferring the ownership of Debentures. In this case although interest will be received by B but it is taxable in the hands of A.
4) 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 is chargeable to tax as the income of the transferor. For eg. A transfers a house property to B. However, A has right to revoke the transfer during the life time of B. It is a revocable transfer and income arising from the house property is taxable in the hands of A.
5) Income from asset transferred to son's wife
If an individual, directly or indirectly transfers asset, without adequate consideration to son's wife, income arising from such asset is included in the income of the transferor. For example, Mr. X transfers 250 TISCO shares to his son's wife without adequate consideration, Interest income on these shares will be included in the income of Mr.X.
6) Income from asset transfer to a person for the benefit of spouse/ son's wife
If an individual, directly or indirectly transfers asset, without adequate consideration to a person or an association of persons for the benefit of his/her spouse /son's wife, income arising from such asset directly or indirectly is included in the income of the transferor. For example, X transfers 8% Government of India Bonds without consideration to an association of persons, subject to the condition that, the interest income from these bonds will be utilized for the benefit of Mrs. X or Mrs. X son's wife. Interest from bonds will be included in the income of X.
7) Income from assets transferred to spouse
Where an asset is transferred by an individual to his spouse directly or indirectly, otherwise than for adequate consideration or in connection with an agreement to live apart, any income from such asset is deemed to be the income of the transferor. For example, Mr. X transfers 1500 Shares of Reliance to his wife without adequate consideration. Dividend income on these shares will be included in the income of Mr. X.
Note: This article is for the general information of the readers. Income tax provisions related to clubbing of income is subject to change; please contact your tax consultant or a Chartered Accountant for more information and guidance
Best Regards
Prakash Nair
www.keralites.net          |
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