Sample this: Suppose you have an annual income of Rs 300,000. That implies that your tax liability to the government is Rs 40,000. Now if you were to divert Rs 100,000 of your income to your spouse or any close relative, your tax liability would come down dramatically by Rs 25,000 to Rs 15,000.
Sounds rather simple, doesn't it? But the government has made sure that you cannot take advantage of the tax system by such diversion.
Hence, clubbing of income under the I-T Act, under which income accruing to certain persons, is to be included in the income of another person for the purpose of computation of tax liability. Here is a look at some of the provisions under this Act.
Transfer of Income
Section 60 of the Income-Tax Act deals with transfer of income arising from an asset but not the asset per se.
For instance, if Mr A owns a house, which fetches rent of Rs10,000 per month, declares that henceforth the rent shall go to Mr B, his relative, but house will remain property of Mr A.
In this case there is a transfer of income without transfer of property and hence rental income shall be included in the total income of Mr A, for the purpose of computing total income.
Revocable Transfer
It is defined in Section 63 as
A provision for re-transfer of asset directly or indirectly of the whole or any part of the income or assets to the transferor.
Right to re-assume power directly or indirectly over the whole or any part of the income or assets.
Where there is a revocable transfer of an asset by a person to the other, then the income arising from such asset is to be included in the income of the transferor, as per Section 61 of the Income-Tax Act.
However, if it is an irrevocable transfer then the income from the transferred asset is not added to the income of the transferor (defined under Section 62)
Income of spouse
If an individual runs a proprietary concern and pays remuneration in the form of salary or commission to his/her spouse, then in such case, the income will be added to the income of the spouse, who runs a business as per section 64(1)(ii). There are two exceptions to this clause
Income to the spouse on account of technical or professional qualification possessed by the spouse.
The income is solely because of the application of his/her technical or professional qualification.
Further, the income from the asset transferred either directly or indirectly to the spouse is included in the income of the transferor, as per section 64(1)(iv) of the Income Tax Act. Such income is not included 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 income.
For instance, if X gifts certain amount to his fiancee then the income arising from such amount is not included in the hands of X, even after their marriage. This is because of the fact that the relationship of husband and wife did not exist at the time of giving the gift.
There are other heads as well, where the income can be clubbed and taxed. Say Y transfers 1000 10 per cent bonds of face value Rs 100 to his son's wife.
Then the interest of Rs10,000 received by his son's wife is included in the total income of Y. But suppose Y transfers this bond before the marriage of his son, then in this case the income is not clubbed with the total income of Y.
Capital gains
If an individual transfers an asset to his wife, who in turn, sells it for a profit, then the capital gains accrued is charged to the husband.
Minor's income
The income of the minor is clubbed with the income of the parent whose income is greater. Once it is included in the total income, then it is clubbed with the income of the same parent.
However, if the parents separate then the income of the minor is included in the hands of the parent who maintains the minor. However, the parent is entitled for exemption of Rs 1,500 from such income.
Exclusions include
- Income of a minor child suffering from disability
- Income, which arises to the minor child on account of manual work done by him.
- Income, which arises to the minor on account of any activity involving application of his skills or talents.
The income of one person is included in the income of another, then in such case it is to be clubbed under the same head. That is, if transferee derives rental income then it is to be included as income from house property in the transferor's hand.
Also, the income of the transferee is included in the income of the transferor, yet section 65 provides that notice of demand can be served to the transferee as well. And the transferee is liable to pay tax attributable to such income.
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