Clubbing of Income

Normally, a person is taxed in respect of income earned by him/her only. However, in certain special cases, a person is also liable to tax on income of other person i.e. said income is to be included (i.e. clubbed) in the taxable income of the taxpayer. In such a case he/she will be liable to pay tax in respect of his/her income (if any) as well as income of other person too. The various scenarios which are covered for clubbing of income are listed in below:

a)   Transfer of income without transfer of asset


If an individual transfers 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).

For example if a NRI has given a bungalow owned by him on rent and annual rent of the said bungalow is Rs. 84,000. NRI transferred entire rental income to his friend
Mr. A. However, he did not transfer the bungalow.
In this situation, entire rental income of Rs. 84,000/- will be taxed in the hands of NRI.? This will be the case of transfer of income (rent) without transfer of asset (bungalow).


b)   Transfer of assets otherwise than for adequate consideration

 

Please note, there are specific clubbing provisions, when an individual transfers any asset without adequate consideration to the spouse or son's wife. Income from such an asset shall be clubbed with income of the individual, if the individual:

· Transfers an asset to his/her spouse directly or indirectly, otherwise than for adequate consideration or in connection with an agreement to live apart.

· Transfers an asset to the son's wife, directly or indirectly, without adequate consideration.

· Transfers an asset to any other person or association of persons, directly or indirectly, without adequate consideration, for the immediate or deferred benefit of his/her spouse or son's wife.


E.g.:1 Mr. A, husband has gifted an amount of Rs. 1 lakh to his wife on the occasion of her birthday. Further, wife has booked a FD in her name out of such funds. In such case, interest received by wife from said will be taxed in the hands of husband as per the clubbing provisions under the Act. 


E.g.:2 Will the above answer differs in case wife has invested money out of gift received from her father?

In this case, the interest income will be taxable in wife’s hands only and will not be clubbed in the hands of the father.

E.g.:3 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?

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.

c)   Clubbing of Spouse's Income


When remuneration by way of salary/commission/fees or any other form is received by the spouse of an individual from a concern in which the individual is having substantial interest, then such income 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.

Meaning of term Substantial Interest:

 

Please note, 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.


d)   Clubbing of Income of Minor Child


Any income of minor is subject to tax in hands of parents, except in below cases:

·       When the minor earns income by any activity involving application of his skill, talent or specialized knowledge and experience or

·       When minor earned income by doing Manual Work or

·        Minor is suffering from any disability as specified in Section 80U of the Income-tax Act, 1961

Further, 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.

The above mentioned provision can be better explained by way of below examples:


E.g.1: 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?


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

 

E.g.2: In the above example, the above answer shall differ in case if the sons have earned the income from their own skills and talent.

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.

e)   Revocable transfer of assets


Revocable transfer is generally a transfer in which the transferor directly or indirectly exercises control/right over the asset transferred or over the income from the asset. If a transfer is held to be a revocable, then income from the asset covered under revocable transfer is taxed in the hands of the transferor. 

 

f)    Clubbing of losses


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 08/2023