Clubbing of Income

Be mindful of these clubbing provisions. Lots of our clients have spouses that are home makers and forget to club the spouse's income in their income tax returns. Do not make such a mistake. 

Under the Income tax Act 1961 an assessee is generally taxed in respect of his own income. However there are certain cases where as assessee has to pay tax in respect of income of other person. These provisions have been enacted to counteract the tendency of part of their property or transfer their income in such a way that their tax liability can be avoided or reduced.

Clubbing of Income _1.PNG

Points to Remember:

  • As per the clubbing provisions, even the losses need to be clubbed in the assesse total income.

  • Tax liability of NRI may increase due to the above provisions. Accordingly, NRI need to consider the aforesaid provisions while doing any transactions in India.

Frequently asked questions

A person has four children consisting of 2 daughters and 2 sons.The annual income of 2 daughters is Rs. 9,000 and Rs. 4,500 and of sons is Rs. 6,200 and Rs. 4,300 respectively. The daughter who has income of Rs. 4,500 was suffering from disability specified u/s 80U, what income shall be clubbed?

As per the provisions of the Act, all such income accruing or arising to a minor child shall be included. However, income of a minor child suffering from disability u/s 80U would not be included in the income of the parent but would be taxable in the hands of minor child. Also income of each minor child includible in the hands of the parent would be exempt to the extent of Rs. 1,500. Accordingly, in present case computation of income to be clubbed shall be as under:

A NRI has given a bungalow owned by him on rent. Annual rent of the bungalow is Rs. 84,000. NRI transferred entire rental income to his friend Mr. A. However, he did not transfer the bungalow. In whose hands will the rental income be taxed?

In this situation, rent of Rs. 84,000 will be taxed in the hands of NRI.​ This is the case of transfer of income (rent) without transfer of asset (bungalow).

Father had purchased a property in Mumbai ten years ago jointly with his minor son and sold the same in 2015 earning a capital gain of Rs. 10 lakh. His son’s age was 16 at the time of sale of the property. In whose hands will the capital gains be taxed?

The capital gains will be taxable in the hands of father, as per the clubbing provisions. As the son is a minor, any income accruing to the minor will be clubbed in the hands of the parent.

Husband has gifted an amount of Rs. 1 lakh to his wife on the occasion of her birthday. Wife has booked a FD in her name out of such funds. What will be the tax treatment of such interest received by wife?

Such interest received by wife will be taxed in the hands of husband as per the clubbing provisions.

Will the above answer differ in case wife has invested money out of gift received from her father?

Yes, the answer will differ and the interest income will be taxable in wife’s hands only.

A husband has bought a house property jointly with his wife in the ratio 50:50 and now intends to sell it. How will the capital gains arising on sale of such property be taxed?

The capital gains will be taxed in the hands of husband alone, unless he is able to substantiate that the share of 50% of his wife in the property is bought by her out of her own earned funds. In case the property is bought out of funds gifted by a husband to his wife, income will continue to be clubbed in the hands of husband.