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Ignoring Clubbing of Income invites Tax Trouble

Normally, you have to pay tax on your income only. However, Income Tax Act stipulates that in certain instances you must pay tax even on the income earned by others. 

Since someone else's income too is included in your income, this provision is called 'clubbing of income'.

The aim, obviously, is to prevent tax evasion.

Say you are in the 30% tax bracket and your daughter is a minor with no income. Now, you cannot avoid tax by opening a fixed deposit in her name. Interest received by "your child", on this fixed deposit, must to be added to "your" income and taxed accordingly.

Key provisions of "clubbing of income" are detailed below.

a. When you transfer any asset, say a house, FD, bonds etc., to your spouse without any adequate consideration (i.e. as a gift) then the income s/he earns on such assets will be clubbed with your income. Even when you transfer cash, which is then used to buy any asset or say starting a business, then the income from such assets / business would be added to your income.

b. Income earned only on the original contribution is to be clubbed. Income on income, due to the compounding factor, becomes the spouse's income and hence not liable for clubbing.

c. When it comes to the income of your minor children, the same too must be clubbed (unless they have earned it out of manual work, skill, talent, knowledge etc. or they suffer any specified disability). It would be clubbed with the parent whose income is higher. A deduction of up to Rs.1,500 is permitted from such income. Unlike in case of the spouse, herein compounding is ignored and even income on income is clubbed and taxed.

Be aware of the 'Clubbing of Income' provisions under the Income Tax Act

d. When you transfer the income earned on any asset to someone else, while still owning the asset, then such income is taxable in your hands. This, of course, is pretty plain and obvious.

e. However, even when you transfer the asset but continue to have any direct or indirect control over it, Income Tax Act will treat it as your income and tax it.

f. If you have a beneficial ownership in any company and that company employs your spouse, then the salary received by your spouse would be clubbed with your income unless he or she is technically or professionally knowledgeable / experienced for the particular job.

g. In-laws transferring any assets to their son's wife would be clubbed with their income, in case no adequate consideration has been been paid for the same. However, if such transfer happens before marriage, clubbing will not apply.

h. Any such transfers to other persons, which would ultimately benefit the spouse / son's wife, too fall under the purview of clubbing.

i. If there is a loss rather than any income under the various instances discussed above, then the loss too is clubbed.

j. The clubbing happens under the respective heads of income depending on the nature of income.

This, in a nutshell, is what Section 60 to 64 of the Income Tax Act specify with regards to clubbing of income. 

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