Under Income Tax Act 1961, a person must pay income tax on earned income by him. However, there are certain cases or scenarios where clubbing of income tax provisions is implemented. And the person has to pay income tax on the clubbed income as well. Hence, if you plan to transfer property to your spouse or anyone else, hold it down for a minute. Because today, you will learn about clubbing of income in income tax and how it can affect your tax liabilities.
What is Clubbing of Income?
Clubbing of income in income tax means adding the other person’s income to the assessee’s total taxable income. This is mentioned in section 64 of the Income Tax Act and has some exceptions. The assessee can not transfer their tax liability to others by transferring owned property or taxable units.
For example, if A transfers Rs 1,00,000 to his wife B, and B invests the same money in the FD scheme of the national-level bank. So, the earned interest from the FD scheme will be considered the income of A, and it will get clubbed with A’s taxable money to charge tax. However, if B reinvests the earned interest on the FD scheme, in that case, B will be responsible for paying taxes.
Persons Eligible to Club Income
There are several conditions when clubbing of income can take place. According to Section 64 of the IT Act, some specified conditions and types of income can be clubbed with the assessee’s total income. And not all incomes can be clubbed on a random basis to charge tax. Below is a tabular form explanation of when clubbing of income can take place. So, read it to get more information about whether you have to pay tax under the same or not.
When Does Clubbing of Income Take Place?
|Section||Person||Scenario||Income to Club|
|60||Any person||It’s a case when a person transfers income but does not transfer property or assets by doing an agreement.||If this case is applicable, the assessee will have to pay tax on income from the asset.|
|61||Any person||Transferring the property or asset on the condition that it can be revoked in the future.||In this case, the earned income from the transferred asset will also be clubbed in the assessee’s income to pay tax.|
|64 (1A)||Minor||The clubbing of income provision applies to any income generated to your minor child, including adopted and stepchild. It also applies to minor married daughters for this provision.||The income earned by the child will be clubbed in the earnings of the parent who has higher earnings. However, if parents live separately, clubbing of income will take place for a parent who takes care of the child in the previous year. When this happens, parents are allowed to get a Rs 1,500 exemption for tax savings. There is some exception to this provision that it does not implement. The income of disabled children does not include clubs, as is mentioned in section 80U of income tax. Even if a child earns money from manual work where the child puts effort and skill, it will not be clubbed. The income of an adult child, the investment made by an adult child, and gifts to the adult child are also exempted under the IT act.|
|64(1)(ii)||Spouse||When the spouse gets remuneration in the form of nomenclatures such as salary, fee, commission, or any type of income.||Income shall club in the spouse’s income whose earnings are higher before clubbing. However, if the spouse earns such income using their technical or professional skill or degree, that case, it will not be applicable.|
|64(1)(iv)||Spouse||Transfer or asset directly or indirectly to spouse for the inadequate benefit.||The income will be clubbed in the income of the transferor of the asset until the transferred property is not house property. This section will not be considered if the spouse has taken divorce, the transfer taken before marriage, or the asset transferred to the spouse out of pin money.|
|64(1)(vi)||Daughter in law||Transfer of asset directly or indirectly to daughter in law for the inadequate benefit.||The earned income from such property will be clubbed in the transferor’s income.|
|64(1)(vii)||Any person or association of person||Transfer or asset to any person or association of a person on inadequate consideration to benefit the spouse immediately or later.||In this case, income earned from the transferred property will also get added to the transferor income.|
|64(2)||HUF||Person transfer property or asset to a member of HUF for inadequate consideration or convert such individual property into HUF property.||The income earned from the property will also be clubbed, as mentioned in the income tax act.|
Clubbing of Income Example
Let’s look at a simple example to understand the concept of clubbing of income.
If Mr. A transfers Rs 10,00,000 to his wife, Mrs. A and then she invests that money in Punjab Nation Bank’s FD scheme, where she earns Rs 5,000 each year.
In this case, the earned income from the FD deposit will get clubbed in Mr. A’s income as per section 64 (1) of income tax.
If Mr. A and Mrs. A do not live together or have taken divorce, the provision will not apply.
If the money is sent before their marriage, income will also not club.
Things to Remember in Clubbing of Income
Here are some major terms you must know about clubbing income under the income tax act.
- The clubbing of income provision takes place in both profit and loss situations.
- The capital gain on the transferred property will be considered the transferor’s income, and provision will apply.
- The income derived from the converted asset will also club the transferror’s income.
- The clubbing provision does not apply to earnings from clubbed income.
How to Avoid Clubbing Income to Get Tax Benefits?
If you want to avoid the clubbing of income provision and want to get a tax benefit. Below are some tips that can help you in the same, so have a look below.
- Gift money to your wife or even daughter-in-law before the marriage.
- If you live with your family and your house is registered with their name, you can pay the rent and claim exemption.
- You can get health insurance for your family and claim a deduction under 80D of Rs 50,000.
- You can give your spouse a loan at a low-interest rate instead of a gift.
Clubbing income under the income tax act 1961 means adding someone else’s income to the assessee’s income to charge tax. This article discussed the various cases when this provision can apply and learned some exceptions. We also discussed some elements that you must remember about clubbing of income. At last, we discussed how to avoid clubbing income to get a tax benefit. I hope now all of your doubts are clear and you know “what is clubbing of income.”