What is income clubbing under taxation?

Income clubbing refers to earnings on investments made by you on behalf of a close relative, such as a minor kid, spouse, or daughter-in-law.

  • Publish Date - September 15, 2021 / 05:49 PM IST
What is income clubbing under taxation?
Income clubbing is used to ensure that taxpayers do not evade their tax obligations by transferring income or assets within the family.

It is a great idea if you are investing for yourself and planning for your future goals. However, it is more so noble if you are investing in the name of your spouse or your children. That said, any investment attracts tax, and so does the clubbing income of someone else with your income. There are numerous rules regarding income tax clubbing, regardless of whether it is with a parent, a minor child, a spouse, or a daughter-in-law. Clubbing income might result in tax savings through investments in the child’s name or loans to the spouse or child.

Understanding income clubbing

Income clubbing is used to ensure that taxpayers do not evade their tax obligations by transferring income or assets within the family. While a taxpayer is generally expected to pay tax on their income, the tax department allows for specific conditions in which the incomes of members of a family may be combined and taxed.

Income clubbing refers to earnings on investments made by you on behalf of a close relative, such as a minor kid, spouse, or daughter-in-law. These earnings are combined, and you are ultimately taxed on your overall earnings. Further, all investments, including real estate, fixed deposits, stocks, mutual funds, and post office savings, are included.

Income is grouped according to the provisions of sections 60 to 64 of the Income Tax Act, 1961. Additionally, the clause stipulates that income earned from assets transferred directly or indirectly under the circumstances other than for due consideration to other people or organisations that are likely to benefit the assessee’s spouse or daughter-in-law is to be included in the assessee’s earnings.

Minor child

-Fixed deposit income earned in the name of a minor kid will be combined with the income earned by the higher-earning parent and taxed accordingly. In the case of divorced parents, the parent who is responsible for the child will be taxed.

-When combined with your income, the income of minor children entitles you to tax deduction of Rs 1,500 for each child.

“I believe that the clubbing of tax is a great option for every small investor, and if we see it through the savings points of view, an individual can claim a Rs 1,500 deduction per child if investments are made by child’s name. Also, if a person can hold the equity mutual fund for more than 12 months, he can get his eligible capital gain tax exemption, and just in case he’s investing in a debt-oriented mutual fund, then he must wait for at least three years,” said Amit Gupta, MD, SAG Infotech.

-However, there are exceptions for disabled children and minors who earn money through their talents, experience, expertise, or manual work.

Spouse

Income from investments placed in the name of your spouse is combined with your income and taxed accordingly.

“Any income arising from Mutual fund investment made in wife’s name would be clubbed with the income of the husband and subjected to tax in his hands u/s 64(iv) of the IT Act. It is pertinent to note that the clubbing provisions would even be attracted if the husband gifts the cash for the investment to his wife and, the wife thereon derives income from such investment,” said Suresh Surana, Founder, RSM India.

“Also, in order for the clubbing provisions to apply, it is necessary that the relationship between the husband and wife should exist at the time of transfer of asset as well as at the time of generation of income,” said Surana.

Major child over age 18 years

Income from investments made by a major kid (over 18 years) is taxed in the child’s hands solely, even if you made the investments.

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