Clubbing of income under income tax laws

The income tax laws have certain provisions for clubbing of income with the income of the person other than the person who has earned the income. In this article I will discuss the provisions applicable to individual taxpayers.

Clubbing provision applicable on transfer of assets

Income arising on assets gifted by members to the HUF: Though the gifts received by an HUF from its members are outside the scope of section 56(2), which provides for taxation of gifts received by a person if the aggregate of all gifts exceeds threshold of fifty thousand rupees in a year, however, gifts received from certain specified relatives are excluded from such provisions. For this purpose all the members of the HUF are treated as HUF’s specified relatives and therefore there is no tax implication for HUF in respect of gifts received by it from its members irrespective of the value of the gifts. Though the transaction of gifts from members by an HUF is not subject to tax, but any income which arises to the HUF is required to be included in the income of the member who had gifted such asset. The clubbing provisions will apply as long as the HUF exists. In case the HUF is fully partitioned, the clubbing provisions will continue to apply in respect of the share of asset transferred to your spouse.

Income arising to spouse or daughter in law: Like gifts received by an HUF from its member, gifts received by a daughter in law from her in parent laws and spouse from another HUF are also not treated as income under income tax laws as your spouse and parents in law are also covered in the definition of specified relative. However, in respect of the any asset to transferred to your spouse or daughter in law, the income arising from such asset is required to be clubbed with your income as long as the relationship subsists.

Transfer of assets under revocable transfer or transfer of income without transfer of the asset

When a person transfers income of an asset without actually transferring the asset to the beneficiary, income received from such asset by the beneficiary is required to be included in the income of the actual owner of the assets. Likewise, when a person transfers any asset which can be revoked by him any time the clubbing provisions will apply to income arising on such transferred. However, clubbing will not apply when such transfer is irrevocable during the life time of the transferee.

In all the cases where the clubbing provisions apply consequent to transfer of any asset/income, it is important to note that the clubbing provisions will apply only in respect of the income which arises from the asset so transferred and will not apply in respect of investments made from income already clubbed. Moreover, the clubbing provisions will apply whether the asset is transferred directly or indirectly. The clubbing provisions will continue to apply even when the asset transferred is converted into any other asset.

In case the amount gifted is invested in a product where income is tax-free like tax-free bonds, PPF etc., though such income still will have to be included in the income of the transferor but will not have any tax impact due as the income being tax-free.

Clubbing provisions not related with transfer of assets

Passive income arising to minor children: All the income except the income which is earned by the minor with his skill, talent or labor is required to be included in the income of the parent who has higher income and shall continue to be so included even if the income of such parent becomes lower than the other parents. However, the assessing officer can direct that the income of the minor shall be included in the income of the parent other than the parent in whose income it has been clubbed hitherto. There is a basic exemption of upto fifteen hundred in respect of income of each of the minor children. The clubbing provision do not apply in respect of a minor child who is differently abled. In case of separation between the parents, the income will be clubbed with the income of the parent who maintains such minor child. The clubbing provisions will cease from the year in which the minor becomes a major.

Income arising to your spouse from certain concerns: In addition to income arising to your spouse from transfer of any asset, any income arising to your spouse, by way of salary commission, fee or any other remuneration from a concern in which you have either voting rights or beneficial interest of 20% or more. However, in case the income is earned by the spouse due to application of his/her technical knowledge or professional qualification the clubbing provisions will not apply. So in case of partnership firm of professionals where both the spouse are partner the income of each of the spouse will be taxed in their hands.

I am sure the above discussion will help avoid the transactions which attract clubbing provisions.

(The author is a tax and investment expert, and can be reached at [email protected])