Clubbing of Income: What is it? and When is it applicable?
What is Clubbing of Income?
Normally, a person is taxed in respect of income earned by him only. However, in certain special cases the income of other person is included (i.e. clubbed) in the taxable income of the taxpayer. In such a case he will be liable to pay tax in respect of his income (if any) as well as the income of other people too. The situation in which the income of another person is included in the income of the taxpayer is called clubbing of income.
For example: If the income of your spouse is included in your total income and also taxed in your hand, then this is known as clubbing of income.
However, there would not be any clubbing of the income, earned from the investment of clubbed income. For example, Hari transfers Rs. 10,000 to his wife Priya and Priya invests the money in an FD scheme. Now the interest earned on this FD would get clubbed in the total income of Hari and he would be liable to pay tax on the same. However, if Priya re-invests the interest earned (i.e clubbed income) in some FD or any other investment scheme then the income from such re-investment would be taxable in the hands of Priya only. This interest income from reinvestment will not be clubbed with Hari’s income.
When does Clubbing apply?
In case of following situations, clubbing provisions will apply:
1. Transfer of income without transfer of asset to any person:
Clubbing applies when you (transferor) transfer your income to some other person without transferring the ownership of the asset from which the income is derived. Therefore the income so transferred will still be included in your total income and also taxable in your hands.
Eg: Pranav transferred the income from his rental property, to his wife Divya. The property is in the name of Pranav only and ownership of the property is not transferred to Divya. In this situation, rental income will be taxed in the hands of Pranav only.
2. Transfer of asset (revocable transfer) to any person:
In case of a revocable transfer* of asset the clubbing will apply and hence the income from such asset will be taxable in the hands of transferor even though asset has been transferred.
*Revocable transfer of asset means where a transferor retains the right or power to re-acquire the whole or any part of the asset or the income from such asset at any time in future during the lifetime of the transferee.
Eg: If in the earlier example, Pranav transfers the rental income as well as the property to Divya, with a condition that the he can re-acquire the property whenever he wishes. In this situation, rental income from the property will be taxed in the hands of Pranav only.
Clubbing of Spouse Income
1. Income earned by your Spouse from the firm/company in which you have substantial interest:
Your spouse income from such a firm/company will get clubbed with the income of the person (you or your spouse) having a higher total income. While comparing the total incomes, income from such a firm/company should be ignored.
A person is said to have substantial interest if he/she individually or along with his/her relative holds 20% or above shares of the company or exercise the voting power of 20% or above. In the case of a firm if a person is entitled to have a share of 20% or above in profits.
However the above clubbing provision shall not apply if the income earned by your spouse is due to practical application of professional/technical skill he/she possesses.
Eg: Pranav holds 51% of the shares in a private limited company. His wife Divya is a getting a salary of Rs. 20,000 per month from the same company. She is not an active employee and does not contribute towards company’s operations. Pranav’s total annual income is Rs. 10,00,000 whereas Divya’s total income (Excluding salary from company) is Rs. 5,00,000. In this situation, Divya’s annual salary of Rs. 2,40,000 will be clubbed with Pranav’s income and it will be taxable in the hands of Pranav.
2. Income from the asset transferred to the Spouse against inadequate consideration :
The above income will get clubbed in your total income and you would be liable to pay tax on that income.
However, the clubbing shall not apply if the above transfer is in a connection with an agreement to live apart or divorce.
Let’s see an example below to understand above provision completely:
Rohan transferred an asset worth Rs.1,50,000 to his wife for a consideration of Rs 50,000. Here ⅔ rd (two-thirds) of the income from the asset would get clubbed in Rohan’s income and he would be liable to pay tax on this income. However, balance ⅓ rd will be taxable in the hands of his wife as she has paid Rs 50,000 being 1/3rd (one-third) of the value of the property.
3. When an asset is transferred to any person or association of person for the immediate or deferred benefit of your Spouse:
In such a situation, any income out of such an asset would get clubbed in your total income and you would be liable to pay tax on the same.
Clubbing of Income of Son’s Wife
1. When asset is transferred to Son’s wife
Income earned by your Son’s wife from the asset transferred to her against inadequate consideration would get clubbed in your total income and you would be liable to pay tax on it.
2. When asset is transferred to any person or association of person for immediate or deferred benefit of Son’s wife
Here the Income earned from the asset transferred against inadequate consideration would get clubbed in your total income and you would be liable to pay tax on it.
Note: Clubbing would be applicable only when your relationship with spouse and Son’s Wife exist both at the time of transfer of asset and at the time when income is earned.
Clubbing of Income of a Minor child
Any income earned by a minor child (including married minor daughter) will get clubbed with income of the parent whose total income is higher (before inclusion of income of minor child).
In case of a minor child, whose parents are living apart because their marriage relationship does not exist, any income earned by such minor child would get clubbed in the total income of the parent who is maintaining the child.
The income of a minor child would not be clubbed in following circumstances:
- The minor child has earned income through his/her manual work
- The minor child has applied his/her skill, talent, specialised knowledge and experience for earning the income.
- If the minor child is suffering from any disability (disability defined as per section 80U)
- In case of transfer of House property to married minor daughter, the clubbing will not apply here. Hence any income generated by House property would not be taxable in the hands of Parents.
Clubbing of Income of a Major child
There will not be any clubbing of the income earned by major child (18 years and above) with the total income of the Parents. Whether the major child is earning using his own specialization/skill or on investment of money or asset transferred to him by his Parents.
For example: Rohan who is 18 years old gets Rs. 50,000 as gift from his Father/Mother. He invest the money in a FD scheme. Now the interest income on FD would be taxable in the hands of Rohan only. It would not get clubbed with the total income of the Parents.
Clubbing of Income from H.U.F Property
If you are a member of a HUF and you transfer your property to the common pool of such HUF for inadequate consideration then the income from such property will get clubbed with your total income and you would be liable to pay tax on it.
However, when this transferred asset gets distributed among family members as a result of the complete or partial partition of HUF, the income from the asset received by your spouse would get clubbed in your total income and you would be liable to pay tax on it.
Frequently Asked Questions
1. How to show clubbed income in ITR?
Except for ITR-1 & ITR-4S, every other ITR contains a section where you can add the income of other person included in your income. The details which you have to provide are:
- Name of person
- PAN of a person (Optional)
- Nature of Income
You also need to make sure that whatever income you enter over here has already been added to the incomes in their respective heads