A guide to Clubbing of Income in India

INTRODUCTION

In India, Income tax is levied on a slab system. These are considered to be progressive rates of tax and as the income goes up, the rates also go up. At present, the income tax rates start from a minimum of 10 % and it goes up to 30%.However, there is a tendency among the tax payers to reduce their tax liability especially those falling under higher tax brackets, by transferring their assets in favor of their family members or by arranging their sources of income in such a way that tax incidence fall on others, whereas the benefit of the income is derived by them. In order to curb such practices of tax avoidance, necessary provisions have been incorporated in sections 60 to 64 of the Income Tax Act 1961.

Hence a person is liable to pay tax on his own income as well as income belonging to others on fulfillment of certain conditions.
Inclusion of other’s incomes in the income of the assessee is called clubbing of income and the income which is so included is called deemed income. Besides, one very important aspect of these clubbing of income provisions is that they are applicable only for individuals and no other type of assessee like firm, Company etc.

AN OVERVIEW OF CLUBBING OF INCOME

The Following are the circumstances where the income of the other person is included in the income of the assessee.

1. Transfer of income without the transfer the transfer of asset (Sec 60).
2. Revocable transfer of assets (sec 61)
3. Irrevocable transfer of assets for a specified period (sec 62)
4. Transfer and revocable transfer defined. (Sec 63)
5. Income of an individual to include income of spouse, minor child etc. (Sec 64)
   • Remuneration of a spouse from a concern in which the other spouse has substantial interest. [Sec 64(1)(ii)]
   • Income from assets transferred to the spouse. [64(1)(iv)]
   • Income from assets transferred to son’s wife [ 64(1)(vi)]
   • Income from assets transferred to a person for the benefit of Spouse of the transferor[64(1)(vii)]
   • Income from assets transferred to a person for the benefit of son’s wife of the transferor [64(1)(viii)]
   • Clubbing of income of a minor child [64(1A)]
   • Income from self acquired property converted to joint family property.
6. Liability of person in respect of income included in the income of another person.

UNDERSTANDING CLUBBING OF INCOME IN DETAIL

1. Transfer of income where there is no transfer of asset (Sec 60)

Where there is a transfer of income by a person to another person without the transfer of the asset from which the income arises, such income shall be included in the total income of the transferor. It does not matter whether such transfer is revocable or not and whether this has taken place before or after the commencement of Income Tax Act.

2. Revocable transfer of assets (Sec 61)

Any income arising to any person by virtue of revocable assets is chargeable to tax as the income of the transferor. The term revocable transfer is defined in section 63

3. Revocable transfer of assets for specified period (Sec 62)

As per Section 62(1), the provisions of revocable transfer as discussed in Section 61 are not applicable in the following cases:-

• Where income arises to any person by the virtue of transfer by way of trust, which is not revocable during the lifetime of the beneficiary.
• Where income arises to any person by any other way which is not revocable during the lifetime of the transferee.
• Where income arises to any person by way of transfer made before 1.4.1986, which is not revocable for a period of 6 years or more.

provided that the transferor derives no direct or indirect benefit from such income in any case.

However, incomes will be chargeable to tax as the income of the transferor as and when the power to revoke the transfer comes into play.

4. Transfer and Revocable Transfer Defined.(Sec 63)

For the purpose of sec 60, 61 and 62 and of this section , Transfer includes any settlement, trust, covenant, agreement or arrangement And,A transfer shall be deemed to be revocable if-

• It contains any provision for the re-transfer, directly or indirectly of the whole or any part of the income or assets to the transferor, or
• It gives the transferor a right tore-assume power directly or indirectly over the whole or any part of the income or assets.

In other words, if any settlement contains a clause for forfeiture of rights of beneficiaries under certain circumstances, the settlement will be regarded as revocable.

5. Income of an individual to include income of spouse, minor child etc. (Sec 64)

• Remuneration of spouse from a concern in which other spouse has substantial interest. [Sec 64(1) (ii)].

In computing the total income of an individual, there shall be included all such sums as arise directly or indirectly to the spouse, of such individual any way of salary, commission, fees or any other form of remuneration, whether in cash or kind from a concern in which such individual has a substantial interest. However, remuneration which is solely attributable to technical or professional knowledge and experience of the spouse will not be clubbed.

Where both husband and wife have substantial interest and both are getting remuneration from the concern, then the remuneration of both shall be clubbed in the hands of that spouse whose total income before including such remuneration is greater.

An individual shall deemed to have a substantial interest in the concern if-

• The concern is a company: the assessee alone or along with his relatives at any time during the previous year owns not less than 20% of equity shares.
• In any other case: the assessee alone or along with his relatives is entitled to at least 20% of the profits of such concern at any time during the previous year.

Here relatives mean husband, wife, brother or sister or any lineal ascendant or descendant of the individual.

• Income from asset transferred to spouse [Sec 64(1)(iv)]

Where an asset (other than house property) is transferred by an individual to his or her spouse directly or indirectly otherwise than for adequate consideration or in connection with an agreement to live apart, any income from such asset will be deemed to be the income of the transferor. This provision is not applicable to the house property because in that case , the transferor is deemed to be te owner of the house property and the annual value of the property is taxed in the hands of the transferor as per section 27. However, when there is a capital gain on the transfer of such house property, such capital gain will be first be computed in the hands of the transferee and thereafter the same will be clubbed with the income of the transferor as per provisions of this section.

The income from the transferred assets shall not be clubbed in the following cases:-

• If the transfer is for adequate consideration
• If the transfer is under an agreement to live apart.
• If the relationship of husband and wife does not exist, either at the time of transfer of such asset or at the time of accrual of the income.

• Income from assets transferred to son’s wife [sec64(1)(vi)]

Any income which arises from assets transferred directly or indirectly by an individual to his son’s wife after 1.6.1973, otherwise than for adequate consideration, shall be included in the income of the transferor.

• Income from assets transferred to any person for the benefit of the spouse of the transferor [sec 64(1) (vii)].

Where an asset is transferred to any other person or association of persons, without adequate consideration for the benefit of the spouse of the individual as well as for some other persons, income on such asset to the extent of benefit which accrues to the spouse, shall be included in the total income of the individual.

• Income from assets transferred to any person for the benefit of son’s wife [Sec 64(1) (vii)].

Where an asset is transferred to any other person or association of persons, without adequate consideration for the benefit of Son’s wife of the individual as well as for some other persons, income on such asset to the extent of benefit which accrues to the Son’s Wife, shall be included in the total income of the individual.

• Clubbing of income of Minor child [Sec 64(1A)].

In computing the total income of an individual, there shall be included all such income as arises or accrues to his minor child.

The income shall be clubbed in the hands of the parents whose total income excluding the income of the minor child is greater. And if the marriage of his parents does not subsist, the income shall be clubbed in the hands of that person who maintains the minor child in the previous year. Where any income is once included in the total income of either parent, any such income arising in any succeeding years shall be included in the income of the same parent unless Assessing officer is satisfied that it should be clubbed with the other parent.

Further, a deduction up to Rs. 1500 per minor shall be allowed against such income which is clubbed in the hands of the parent.

However, the following income of a minor shall not be clubbed and will be taxed in the hands of the minor himself.

• Manual work done by him
• Activity involving application skill, talent or specialized knowledge or experience.
• Any income of minor child suffering form disability of the nature specified in section 80U like physical disability, blindness etc

• Income from self acquired property converted into joint family property.[Sec 64(2)]

Where an individual, who is a member of the Hindu undivided family-

• Converts his separate property as the property of the HUF or,
• Throws the property into the common stock of the family or,
• Otherwise transfers hid individual property to the family,

Otherwise than for adequate consideration, then the income from such property shall continue to be included in the total income of the individual. If the converted property is subsequently partitioned among the members of the family, the income derived from such converted property, as is receivable by the spouse and the minor child of the transferor will be taxable in his hands. Income from Accretion of the assets:- In the above mentioned cases, the income arising to the transferee from the property transferred is taxable in the hands of the transferor. However, income arising to the transferor from such income is not includible in the total income of the transferor.

For Eg.:- If Mr. A transfers Rs. 60,000 to his wife without any consideration and Mrs. A deposits the money in a bank, the interest received from the bank on such deposits is taxable in the hands of Mr. A. Hiwever, if Mrs. A purchases shares of a company from the accumulated interest, then the dividendreceived on those shres will be taxable in her hands and not in the hands of Mr. A

6. Liability of person (i.e. the transferee) in respect of income included in the income of another person(i.e. the transferor) (sec 65)

Although the income from any asset transferred to certain specified persons (mentioned in the above sections of clubbing of income) is includible in the total income of the transferor, yet section 65 provides that the notice of demand in respect of tax on such income may also be served upon the person to whom such asset has been transferred. On service of such notice, the transferee shall be liable to pay that portion of the tax levied on the transferor which is attributable to the income so included.

OTHER MAJOR ISSUES RELATING TO CLUBBING OF INCOME:-

• Aggregation in hands of father or mother in case of minor’s income – change is possible.

If the assessing officer finds that it is the other parent with higher income, he may issue a notice and shift the aggregation to other parent.

• Income from Income not to be clubbed

Income from the income cannot be aggregated in respect of assets transferred to spouse and son’s wife. The law authorizes aggregation only in respect of income and not income of income. However, this provision is not applicable in case of clubbing of minor’s income.

• Loss also to be allowed

Income includes loss. Hence, losses would also be allowed in the hands of the parent with higher income in case of clubbing of minor’s income.

• Trust – benefit deffered beyond minority will avoid clubbing

Where a trust is created for the benefit of the minor child without any right to enjoy the same during the minority but deffered to a date after he attains majority, the income could not be aggregated since there is no benefit to the minor at all during his minority. However, the trust will be assessable on its income in the hands of the trustee.

• Pin Money is not transferred asset.

Where the wife saves money out of the moneys given to her for house-hold expenses which is described as pin money, shall not be treated as asset transferred by her husband and income from such pin money will be assessable only in her hands.

• Gift before marriage is not a gift to wife.

Where an asset is transferred to a would-be wife by way of pre – nuptial settlement, such transfer will not fall under the provisions of clubbing of income.

• Cross Gifts are No gifts.

Cross gifts to avoid application of clubbing provisions can save tax as these will be treated as an indirect transfer, as in case of two brothers giving giftsto each other’s children.

• Child includes adopted child.

Child includes an adopted child but not an illegitimate child.