What is clubbing?
Normally, a person is taxed in respect of income earned by him only. However, in certain special cases income of other person is included (i.e. Clubbed) in the taxable income of the taxpayer and in such a case he will be liable to pay tax in respect of his income (if any) as well as income of other person too, then it is known as clubbing of Income.
Because the tax department wants to make sure that you do not evade tax by spreading your income.
Some taxpayer having higher income, in order to avoid tax, divert some portion of their income to their spouse, minor child etc. Thus clubbing provisions have been introduced to prevent such tax evasion.
Clubbing in respect of income of spouse, sons wife, minor child – section 64
Following income shall be included in computing the total income of any individual:
A.When Remuneration received by spouse of an individual be clubbed with his/her income?
Under certain circumstances as given in section 64(1)(ii), remuneration (i.e., salary) received by the spouse of an individual from a concern in which the individual is having substantial interest is clubbed with the income of the individual. Provisions in this regard are as follows:
– The individual is having substantial interest in a concern; and
– Spouse of the individual is employed in the concern in which the individual is having substantial interest; and
– The spouse of the individual is employed without any technical or professional knowledge or experience (i.e., remuneration is not justifiable).
B. An individual shall be deemed to have substantial interest in any concern, if such individual alone or along with his relatives beneficially:
Holds at any time during the previous year 20% or more of the equity shares (in case of a company) or is entitled to 20% of profit (in case of concern other than a company).
Relative for this purpose includes husband, wife, brother or sister or lineal ascendant or descendent of that individual [section 2(41)].
C. When Clubbing of Income of Minor Child? (Minor means the person whose age is less than 18 year old)
Income of a minor is taxable in the hands of the parent whose total income is higher (before including the minor’s income).
If the parents are divorced it is clubbed with person who is maintaining the child.
There is one exception to this rule – if the minor has earned an income because of his own manual work, or used his talent or specialized knowledge & experience OR in case of a minor who is disabled (based on definition of disability in Section 80U) and earns an income, such income will not be clubbed.
Exemption to this clubbing provision;
A. When your minor child’s income is clubbed to your income
Exemption is available up to ₹ 1500 for each such minor child. Which means if clubbed income is more than₹ 1500, ₹1500 is the maximum exemption, however if clubbed income is say ₹ 800 (less than ₹ 1500) exemption is limited up to such lesser amount, ₹ 800 in this case.
Clubbing of Income of a Major Child (18 or more than 18 years old) :
No such clubbing of any income in any circumstances in case of major child.
B.Clubbing of Income of a Son’s Wife:
You transfer an asset to your son’s wife directly or indirectly without receiving adequate consideration, income from this asset will be clubbed with your income.