“What is Clubbing of Income?”, “How to Avoid Clubbing of Income?” And Provisions of Clubbing of Income

Introduction

According to the rules of the Income Tax Act, a person must pay taxes on all taxable income earned during a financial year. ‘Clubbing of Income’ occurs when the income of any other family member is factored into the Gross Total Income calculation. Section 64 of the Income Tax Act of 1961 deals with income pooling. By transferring wages and assets within the family, people might avoid paying taxes. In this article we will look into “What is Clubbing of Income?”, Provisions of Clubbing of Income, and “How to avoid Clubbing of Income?”

What is Clubbing of Income?

To counteract this strategy, income clubbing was adopted to ensure that no tax was dodged when assets or income sources were moved within the family. Combining the income of two or more family members is referred to as “Clubbing of Income.” The sum of income is added together and processed as if it were a single source of income. The income is then taxed in its entirety under the 1961 Income Tax Act.

Points to remember for Clubbing of Income 

• The provision of Clubbing of Income applies to both, Profit as well as Loss.

• The capital gain on the transferee’s subsequent transfer of the asset will be considered income and will be included in the transferor’s income.

• In the hands of the transferor, the income produced from the changed form of asset must be combined.

• If just part of the consideration is payable or paid, the transferor will be left with only the insufficient consideration.

• The laws against clubbing will not apply to revenue derived from clubbed income.

Various instances in which the provisions of Clubbing of Income are applicable

• Provision of Clubbing of Income of a minor child

Any income a minor kid earns is combined in the hands of one of his or her parents, whose income (excluding minor child income) is higher. For example, if a minor child has a fixed deposit, the interest collected will be combined with the income of the parent who earns the most. However, there are some circumstances in which the Clubbing of Income restrictions do not apply, according to Income Tax regulations. Below are the points in which the Clubbing of Income provision does not apply:

1. When a minor child has a disability as defined in Section 80U.

2. A minor child earns money via manual labor at that time income cannot be clubbed.

3. When a minor child earns money through his skill, talent, or knowledge, etc.

• HUF (Hindu Undivided Family) Clubbing of Income

The Hindu Undivided Family has existed for millennia. HUF is also recognized as an assessee under the Income Tax Act. In layman’s terms, a HUF is also required to file a tax return. It is clear that income provision clubbing is also attracted in the case of HUF. If any of your personal assets were transferred to the HUF without proper consideration, all income generated by that asset would be taxed in your hands. In the event that your HUF (Hindu Undivided Family) is split in the future, the distributed property in your spouse’s hands will be combined with your earnings.

• Transfer of income without Transfer of Assets

When someone transfers income without also transferring ownership of the asset from which the money is generated. Then, in the hands of the transferor, such income will be taxable. The most common example we encounter is rental income, which occurs when a property owner asks a tenant to make rental payments in the name of his or her parents, wife, or children. People frequently perform tax planning by moving income to family members by first creating an agreement for income transfer without the legal ownership transfer of assets, and then accepting rental checks in their family name.

• Clubbing of Income of Spouse

Strategies on “How to avoid Clubbing of Income?”

• Invest in the name of a non-working spouse

While the income made on the money invested or transferred to your spouse is clubbed, the income received on that income is not. If you buy a house in your wife’s name, for example, the rental income from that place, say INR 30,000, will be clubbed. If the house is in your wife’s name, however, any additional income generated by investing the INR 30,000 rental earnings will be tax-free.

• Pay rent and save money

If you live with your parents and the property is theirs, you can pay the rent and earn a housing rent allowance exemption by paying the rent. Your parents may also be eligible for additional payments if they have no other source of income. They will not have to pay income tax because they will be under the basic exemption limit.

• Income given to your wife or a daughter in law as a form of a gift before marriage 

If your wife or daughter-in-law is unemployed and has no source of income, you can save up to INR 250,000 and give it to her before the wedding. It is crucial to note, however, that this can only be done before marriage. If you contribute money after your marriage, you will be subject to clubbing requirements.

• Investing in products like the PPF (Public Provident Fund)

Because the maturity profits of PPF are tax-free, you can generate tax-free income by investing in products like PPF (Public Provident Fund) in the name of your spouse or minor child. The same can be said for stock assets. Money can also be transferred to senior citizens, minor children, or a spouse with a lower tax burden who can invest it in a PPF to earn higher tax-free returns.

Conclusion

Individuals’ income is directly affected by the clubbing rules of the income tax legislation, thus proper understanding is essential. When calculating an individual’s total income, the income of any and every person cannot be randomly mixed, nor can all of a given person’s income be combined. Only certain specified income of specified persons can be combined when computing the total income of an individual, according to Clubbing of Income under Section 64 of the Income Tax Act.