Clubbing of income, as the name suggests is the income of one person is clubbed with the income of the another person. Many of the persons think that if they will divert their income in the account of some other person, then their tax liability will get reduced. But this is not the case.
Provisions related to clubbing of income
The Income Tax Act, 1961 deals with the provisions of clubbing of income and as per this Act, every person has to pay taxes on his income. A person cannot transfer a part from his source of income to another person and claim that such income so transferred does not belong to him. For instance, income of husband which is shown to be the income of his wife is clubbed in the income of Husband and is taxable in the hands of the husband.
Clubbing of Income of Husband with Income of Wife
Clubbing of income of husband with income of wife is dealt under Section 64(1)(IV) and Section 27 of the Income Tax Act, 1961.
Also Read: Clubbing Of Income Of Minor Child
As per Section 64(1)(IV) of the Income Tax Act, there are certain conditions which have to be satisfied. They are as follows:
– Taxpayer is an individual
– He has transferred an asset other than house property
– The mode of transfer may be direct or indirect
If a husband transfers an asset in his spouse’s name without any consideration (directly or indirectly), then income from such asset will be clubbed in husband’s income.
For instance Mr. A transfers Rs. 2,00,000 in Mrs. A name as gift. In return Mrs. A invest this Rs. 2,00,000 into fixed deposit. Assuming this fixed deposit earned Rs. 20,000 after a year. As per this rule of clubbing of income, this fixed deposit is not the income of Mrs. A but it is the income of Mr. A (even though the fixed deposit and TDS are in the name of Mrs. A).
The word “consideration” has been used under Section 64(1)(IV).
Let us take another instance, let us assume Mr. A transfer Rs.2,00,000 worth of an asset in Mrs. A name with the consideration of Rs. 50,000 (Mrs. A pays Rs. 50,000 to Mr. A for buying an asset). Then, Mrs. A will turn to be the owner of Rs. 50,000 of that asset only. Income generated from this Rs. 50,000 will be the income of Mrs. A and shall be taxable in her name. Rest of Rs. 1,50,000 worth of asset income will be clubbed with Mr. A’s income.
Also Read: Pay Double TDS On Non-Filing Of ITR
Let us assume Mr. A transferred Rs. 2,00,000 to Mrs. A. Then Mrs. A invested this in fixed deposit which fetch her 10% return per year. So the year end income of Rs. 20,000 is the income of Mr. A (as explained above). However, assume Mrs. A invested this Rs. 20,000 again in some fixed deposit which fetch her 10% return per year. So whatever the earning from this Rs. 20,000 (i.e Rs. 2,000) is the income of Mrs. A but not the Mr. A.
The above-said rules are applicable under Section 64(1)(IV) of Income Tax Act which does not deal with house property. But for house property,
This section deals with deemed ownership of house property. The conditions that are to be satisfied under this section are
– There must be a transfer of ownership
– The transfer of ownership must be for adequate consideration
– The transfer must not be in connection with an agreement of divorce settlement or with adequate consideration.
Assume Mr. A transferred his house property to his wife Mrs. A without adequate consideration, then in such a case, even if the property belongs to Mrs. A on papers, the deemed ownership of property is said to be with Mr. A. In future, if Mrs. A sells the property, then the capital gain from such property sale is the income of Mr. A but not of Mrs. A
This would, however, not cover cases where the property is transferred to a spouse in connection with an agreement to live apart.
Now let us assume that instead of transferring the house property, Mr. A transferred Rs. 90 lacs to Mrs. A. In return, Mrs. A purchased a flat. The ownership, in this case, is with Mrs. A. However, any rental income or capital gains from this property is the income of Mr. A (even though here the ownership is with Mrs. A).
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