Clubbing of Income

1. What and when is the concept of Clubbing of Income in India attracted for the purposes of taxation under the Act?

Ans.

Normally, a person is taxed in respect of income earned by him/her only. However, in certain special cases income of other person is included (i.e. clubbed) in the taxable income of the taxpayer and in such a case he will be liable to pay tax in respect of his income (if any) as well as income of other person too.


The provisions of clubbing of income generally gets attracted in following case of Assets transferred by way of -

 

 i. Gift by an individual (Donor) to his/her spouse (Recipient)

ii. Gift by Parents (Donor) to Minor Child or Grandchildren or Daughter-in-law (Recipient)     

Please note that above are some illustrations of clubbing of income in case of assets transferred by way of gift and the same is not an exhaustive list.

Upon such assets transferred, any income earned by the Recipient from the said gift shall be clubbed in the income of the Donor.

2. Is minor child’s income clubbed with the income of parent?

Ans.

Any income of minor is subject to tax in hands of parents, except when the minor earns income as Artists having Special Skills or by doing Manual Work or in case minor being Differently Abled.


Income of minor will be clubbed with the income of that parent whose income (excluding minor's income) is higher. If the marriage of parents does not sustain, then minor's income will be clubbed with the income of parent who maintains the minor.

3. A NRI has four minor children consisting of 2 daughters and 2 sons. The annual income of 2 daughters is Rs. 9,000 and Rs. 4,500 and of sons is Rs. 6,200 and Rs. 4,300 respectively. The daughter who has income of Rs. 4,500 was suffering from disability in the nature specified u/s 80U (viz. blindness, low vision, hearing impairment, autism, cerebral palsy, mental retardation, etc.). How and what amount of income shall be clubbed?

Ans.

As per the provisions of the Act, all income accruing or arising to a minor child shall be included in the Income of the said minor’s mother or father, whosevers, parent income is higher. However, income of a minor child suffering from disability specified in the nature referred under Section 80U would not be included in the income of the parent, but would be taxable in the hands of minor child. Further, income of each minor child includible in the hands of the parent would be exempt to the extent of Rs. 1,500/- each. Accordingly, in present case, income of minor child needs to be clubbed as under:

Sr. No.

Particulars

Amount (Rs.)

1

Income of one daughter

Less: Income exempt

 

Total (A)

9,000

(1,500)

                  

7,500

 

2

Income of 2 sons (4300+6200)

Less: Income exempt (1500+1500)

 

Total (B)

10,500

(3,000)

 


7,500

 

 

Total income to be clubbed (A+B)

 

15,000

4. In FAQ no 3, will the above answer differ in case if the sons have earned the income from their own skills and talent?

Ans.

Yes, the answer will differ. The income shall be taxed in the hands of the minor sons as they have earned the income through application of their own skills and talent.

5. Whether provisions of clubbing of income will be applicable in case of transfer of income without transfer of asset?

Ans.

If an individual transfer income from an asset owned by him without transferring the asset from which the income is generated, then the income from such an asset is taxed in the hands of the transferor (i.e., person transferring the income).

6. A NRI has given a bungalow owned by him on rent. Annual rent of the bungalow is Rs. 84,000. NRI transferred entire rental income to his friend Mr. A. However, he did not transfer the bungalow. In whose hands will the rental income be taxed?

Ans.

In this situation, rent of Rs. 84,000 will be taxed in the hands of NRI.? This is the case of transfer of income (rent) without transfer of asset (bungalow).

7. Mr. A, being a father had purchased a property in Mumbai ten years ago jointly with his minor son and sold the same in 2015 earning capital gains of Rs. 10 lacs. His son’s age was 16 at the time of sale of the property. In whose hands will the capital gains be taxed?

Ans.

The capital gains will be taxable in the hands of Mr. A, father (assuming income of Mrs. A is less than that of Mr. A), as per the clubbing provisions under the Act. As son is a minor, any income accruing to the minor will be clubbed in the hands of the parent.

8. Mr. A, husband has gifted an amount of Rs. 1 lac to his wife on the occasion of her birthday. Wife has booked a FD in her name out of such funds. What will be the tax treatment of such interest received by wife?

Ans. Such interest received by wife will be taxed in the hands of husband as per the clubbing provisions under the Act.

9. Will the answer to FAQ No. 8 differ in case wife has invested money out of gift received from her father?

Ans.

Yes, the answer will differ and the interest income will be taxable in wife’s hands only and will not be clubbed in the hands of the father.

10. A husband has bought a house property jointly with his wife in the ratio 50:50 and now intends to sell it. How will the capital gains arising on sale of such property be taxed?

Ans.

The capital gains will be taxed in the hands of husband alone, unless he is able to substantiate that the share of 50% of his wife in the property is bought by her out of her own earned funds. In case the property is bought out of funds gifted by a husband to his wife, income will continue to be clubbed in the hands of husband.

11. Can remuneration received by spouse of an individual be clubbed with his/her income?

Ans.

Remuneration received by the spouse of an individual from a concern in which the individual is having substantial interest is clubbed in the income of the individual, except in case the spouse of the individual is employed on account of his/her technical or professional knowledge or experience.

12. What is the meaning of term Substantial Interest?

Ans.

  An individual is deemed to have substantial interest, if such person (individually or along with his relatives) beneficially holds equity shares carrying not less than 20 per cent voting power in the case of a company or is entitled to not less than 20 percent of the profits in the case of a concern other than a company at any time during the previous year.

13. Are there any situations in which the clubbing provisions do not apply in case of income from assets transferred to spouse?

Ans.

The clubbing provisions are not applicable in the following situations:


· If the transfer of asset is for adequate consideration;

· If the transfer of asset is in connection with an agreement to live apart.

14. Can losses be clubbed?

Ans.

If clubbing provisions are applicable with respect to a particular source of income then losses from such source are also allowed to be clubbed in the income of the transferor. 

Updated 11/2023