Tax Provisions related to Clubbing of Income of Spouse
Clubbing of Income
Normally Under the Income Tax Act, income of a person is chargeable to tax means tax arises only on the income of individual. But sometimes with a view to reduce the tax burden, persons having huge taxable income may shift a portion of their income to persons who do not have taxable income or having income which is not chargeable to tax. This may be achieved by transferring or gifting the income generating assets or by augmenting the revenue earning capacity of certain family members. To remove this malpractice the Legislature has stipulated provisions which is called Clubbing of Income and the income so included called as Clubbed Income.
Clubbing of Income Arises to-
- Spouse – Section 64(1) (Read further)
- Minor Child – Section 64(1A) (already discussed here)
- HUF -Section 64(2) (coming soon)
We have already discussed Clubbing of Income of Minor under Section 64(1A). Here we will discuss the tax implications on clubbing of income of spouse.
Clubbing on income of spouse – Income from assets transferred to spouse without Adequate Consideration
In computing the total income of any individual, there shall be clubbed all such income as arises directly or indirectly to the spouse of such individual from the assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart. (The relationship of husband and wife must exist both at the time of transfer of assets and at the time when income accrues in for the applicability of clubbing provisions.)
The income from the transferred assets shall not be clubbed together in the below instances :
- if the transfer is for adequate consideration.
- the transfer is under an agreement to live apart.
- if the couple are no longer husband and wife at the time of the transfer or at the time of accrual of income.
If the individual transfers any asset other than a house property to his/her spouse, the income from such an asset shall be included in the total income of the transferor (a person who makes a transfer).
Note: The clubbing of Income provisions arises from transfer of house property is not applicable because the transferor is deemed to be the owner of the property (Section 27) and the income from house property is calculated in his/her hands.
Clubbing of Income of Spouse – Remuneration to Spouse
Again in computing total income of any individual, there shall be clubbed all such income as arises directly or indirectly to the spouse of such individual by way of salary, commission, fees or any other form of remuneration whether in cash or in kind from a concern in which such individual has a substantial interest.
When both husband and wife have a substantial interest in the concern and both are in receipt of remuneration from the concern the remuneration will be included the total income of husband of wife whose total income, excluding such remuneration is greater. Where such income is once included in the total income either spouse, any such income arising in any subsequent year will not be included in the total income of the other spouse unless the Assessing Officer is satisfies after giving that spouse a reasonable opportunity of being heard that it is necessary to do so.
Substantial Interest in Concern
- in a case where the concern is a company, if its shares (not being share entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than 20% of the voting power are, at any time during the previous year, owned beneficially by such person or partly by such person and partly by one or more of his relative.
- in any other case, if such person is entitled, or such person and one or more of his relatives are entitled in the aggregate, at any time during the previous year, to not less than 20% of the profits of such concern.
No such clubbing shall take place in relation to any income arising to the spouse where the spouse possesses technical or professional qualifications and the income is solely attributable to the application of his or her technical or professional knowledge and experience. The words “technical or professional qualifications” do not necessarily relate to technical or professional qualifications acquired by obtaining a certificate, diploma, degree or in any other form from a recognized body like a university, institute etc.
House property and the wife
Suppose a house property is transferred to a spouse without adequate consideration or no consideration at all. In this case the transferor still is the owner of the house and all the rental income earns by the transferee will be clubbed in the hands of the transferor.
Now if the house is sold and capital gain arises, then such capital gain will be first computed in the hands of the transferee and then the same will be clubbed with the income of the transferor.
Further, if you buy a house in your wife’s name but she has not monetarily contributed in the purchase, then the rental income from that house would be treated as your income and taxed at the applicable rate. The only way if you want to buy a house in your wife’s name but don’t want the rent to be taxed as your income, is for you to loan her the money.
To complete the barter exchange, she can give you her gold, diamond jewellery or other valuable materials on which she is having possession.
What happens if one transfers shares to his/her spouse ?
If one transfers share to his/her spouse without adequate consideration than no tax is payable since this transfer is not considered as a transfer under section 47 of the Act also gift from spouse is exempt, but any profits generated in future shall be clubbed with your income and taxed accordingly.
Another way to transfer would be to transfer against monetary compensation. In such a case, payment received by the transferor will be subject to capital gains tax and all the future profits shall not be clubbed.
Investing your income in your wife’s name
In case you invest some money in your wife’s name by purchasing some stocks. Any income made on such investments made in the wife’s name is not her income but will be clubbed with your (transferor) income. You will have to pay tax on it.
However, while the income from the transferred investment is to be clubbed with the earnings of the transferor, any income earned on the income is not. That is treated as the independent income of the transferee and the tax liability is also hers. Depending on which tax slab she falls in, she will have to pay tax or might be exempted.
Similarly, if you give money to your wife as a gift and she puts it in a fixed deposit, the interest would be taxed as your income. But if she invest the interest in shares and earns dividend than the dividend so earned shall be not clubbed with your income and shall be assessed as her income.
For example, Mr.A gifts a sum of Rs. 50 lacs to Mrs. A on the occasion of wedding anniversary. Mrs. A invests this amount in the Bank Fixed Deposit, which derives interest Rs.25,000 p.m. The interest income so derived shall be clubbed in the hands of Mr.A, despite the face that it is income from converted assets. Further, if this bank interest is invested in some stocks by Mrs.A which derives Rs. 3000 dividend per month. Than this dividend shall be not clubbed with your income, as there is no provision of clubbing of income’s income.
Recommended Read : General Provisions related to Clubbing of Income