Clubbing of Income – All you need to know

  Circumstances where clubbing provisions attract

1. Transfer of income without transfer of asset:

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   • If a person transfers income from the asset without transferring the asset, such income will be included in the total income of the transferor
EXAMPLE
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If Mr. Kapoor owns a house property and he is transferring the rental income to his family without transferring the house property, then the rental income is taxable in the hands of Mr. Kapoor
2. Income arising from a revocable transfer of assets:

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   • All income arising to any person by virtue of the revocable transfer of assets is included in the income of transferor.
3. Clubbing of Spouse Income:

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   1. Any income such as salary, commission, fees or any other remuneration arising to the spouse of the individual from the concern in which such individual has a substantial interest will be taxable in the hands of individual who has substantial interest.
   2. When there is a transfer of an asset (other than house property) from one spouse to other otherwise than for adequate consideration, any income arising to the transferee from the transferred asset shall be included in the total income of the transferor.
   3. If both husband and wife have substantial interest in a concern and both are in receipt of salary, such income will be taxable in the hands of spouse whose income is higher
EXCEPTION
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This clubbing provision does not apply if the spouse of the said individual possesses technical or professional skills and the income is solely attributable to those skills.
4. Minor Income:

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   • The income of the minor will be included in the income of that parent whose total income is greater.
   • However, if the income is derived by the minor from manual work or from any activity involving his skill, talent or specialized knowledge or experience will not be included in the income of the parent
   • If the marriage of parents does not subsist, the income of the minor child will be taxable in the hands of parent who maintains that child
   • Clubbing provisions will attract in respect of minor married daughter also.
EXEMPTION
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If the income of the individual includes the income of his/her minor child, then such parent shall be entitled to an exemption of Rs 1500 in respect of each minor child.


5. Income generated to the spouse from an asset transferred without adequate consideration:

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   • Transfer of asset (other than house property): If there is a transfer of an asset directly or indirectly from 1 spouse to other, otherwise than for adequate consideration or in connection with agreement to live apart, the income generated to the transferee spouse from the asset transferred is taxable in the hands of transferor spouse

   Example : Mr Krishna has transferred his TCS shares to his wife Rukmini on 31/12/2021. Later Mrs Rukmini has sold these shares on 14/09/2022 for a gain of Rs 1,00,000. This gain of Rs 1,00,000 is taxable in the hands of Mr.Krishna

   • Transfer of House Property : If there is a transfer of a house property directly or indirectly from 1 spouse to other, otherwise than for adequate consideration or in connection with agreement to live apart, the transferor spouse is deemed to be the owner of the house property and the rental income is taxable in the hands of transferor

   Example : Mr Rama has transferred his house property to his wife Sita on 31/12/2021. Mrs Sita is getting rental income from 01/01/2022 to 31/05/2022 and she sold the property on 30/06/2022. Now, the rental income and capital gains from sale of property is taxable in the hands of Mr Rama.

   • Transferred Asset invested in business : If the assets are transferred by an individual to his spouse and the spouse has invested such assets in a business, proportionate income arising to the spouse (transferee) is taxable in the hands of transferor

   Note : If the investment is in the nature of capital, proportionate interest is taxable in the hands of transferor

NOTE
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Income earned by investing the income raised from transferred asset cannot be clubbed.
For Example, if Mrs Sita invested the sale proceeds from sale of property in Fixed deposit, interest earned on Fixed deposit is taxable in the hands of Sita
6. Income arising to son's wife from the assets transferred by father-in-law or mother-in-law without adequate consideration:

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   • If any assets are transferred by In-laws to son's wife without consideration, the transferor (in-laws) is deemed to be owner of the property and the income is also taxable in the hands of In law's