The general concept of taxes is that each individual must pay tax on their earnings. But, there are instances when people plan to transfer assets or income to plan their taxes and avoid tax. Sometimes, they are not aware that even such a practice might attract tax in certain situations.
Even a genuine gift to a friend or relative could have tax implications.
Let’s discuss some insights on this provision of the Income Tax Act.
What is clubbing of income u/s 64?
The event where one individual’s income is added or included with the income of another individual is called clubbing of income.
For example, if a wife’s income is clubbed with her husband’s income and he pays tax on the same, it is called clubbing of income.
This is to ensure that the income earned or assets owned by one person are not diverted to avoid the tax payment. All investments including property, fixed deposits, shares, mutual funds, post office savings, etc are covered as clubbed income.
However, the rules are mandated to discourage this practice, except in case of specified persons & scenarios. Shown below are the common cases:
- Minor child: Any income accruing to or earned by a minor child (below 18 years) shall be clubbed in the hands of a higher-earning parent.
- Tax exemption up to ₹1500 per child can be claimed by the parent.
- Exception: Income of a disabled child (as under 80U) and minors who earn by their own talent, skill, knowledge, manual work, or experience.
- Spouse: Any income of the spouse from investments made in any concern in which the other spouse has a substantial interest shall be clubbed in the hands of the spouse whose income is higher.
- Exception: Spouses who earn income from their own technical & professional qualifications, knowledge, or experience.
- A transfer of any property without adequate consideration to a spouse will be clubbed in the hands of the transferor spouse.
- Daughter-in-law: Any income from investments/assets earned by a daughter-in-law shall be clubbed in the hands of the transferor.
- HUF: If an individual transfers his property to HUF without adequate consideration or converts such property into HUF’s property, then income from such property shall be clubbed in the hands of the individual.
Few Important Points:
- Clubbing of income is applicable in case of loss as well.
- There would not be any clubbing of the income, earned from the investment of clubbed income. This means there is no clubbing of income in case of interest income from re-investment.
- Capital gain on further transfer of the asset by the transferee will be considered as income and it shall be clubbed in the income of the transferor.
Example:
Mr. Patel gifted ₹10,40,000 to his wife. This amount is invested by his wife in the debenture of a company. Will the income from the debenture purchased by Mrs. Patel from gifted money be clubbed with the income of Mr. Patel?
Answer: ₹10,40,000 is transferred to the spouse via gift (i.e., without adequate consideration) and, hence, the provisions of section 64(1)(iv) will be attracted. The provisions of clubbing will apply even if the form of asset is changed by the transferee spouse. In this case, the asset transferred is money, and, subsequently, the form of the asset is changed to debentures, hence, income from debentures acquired from money gifted by her husband will be clubbed with the income of her husband. Thus, interest on the debenture received by Mrs. Patel will be clubbed with the income of Mr. Patel.
Conclusion:
So, correct awareness of the clubbing provisions of the Income Tax Act is crucial since they directly affect the income of individuals
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