Saturday, 7 June 2014

What is clubbing of income?

To The general concept of the Income-tax Law is that income-tax is payable by a person on his income. Thus, every person deriving income from different avenues is liable to pay income-tax in respect of their income so derived during a particular financial year. However, there are certain provisions which are contained in the Income-tax Act whereby the income of one person has to be clubbed or added with the income of another person. The provisions relating to clubbing of income are contained in section 64 of the Income-tax Act,1961.

Hence, in view of the above mentioned section 64 of the Income-tax Act, 1961 in the case of a married lady the income of the married lady will be required to be added to the income of the husband but only in a case whe.  such married lady receives gift from the husband and derives income by making investment of the said gift amount. Similarly a married lady if she were to receive some gift from her father in law or her mother in law, in that situation also if the married lady were to receive certain income out of the investment received from the gifted amount from father in law or mother in law, in that situation also the income from the gifted asset will be required to be added or clubbed with the income of the father in law or the mother in law. 

Thus, it is crystal clear that in case the married lady has her own income from her own sources, then no clubbing provision would apply. Likewise it is also important to note specially in the case of a married lady that in case she were to receive some salary etc. from the husband, in that case also the provision relating to clubbing of income would apply but only when the said married lady receives the salary but does not possess technical or professional qualification. From this provision of the law it implies that if a married lady is technically or professionally qualified, then she has no problem at all of receiving even salary from her husband and the said salary will not be clubbed with the income of the husband. 

It is also important to note that section 56 provides for taxing of the gift received from non-relatives. However, the gift on the occasion of marriage received whether from relatives or non-relatives are completely exempt from income-tax. It may also be noted that the gift received by a married lady from non-relatives is exempted to the extent of Rs. 50,000 in a year. When we talk of gift received by a married lady from her husband or her father in law or her mother in law, then we find that the said gifted amount is not to be added to the income of the said married lady because it is a gift received by her from her relatives. While dealing with the provisions relating to clubbing of income it may be noted that it is the income only which alone is required to be clubbed and not the principal amount received as a gift. If however, the married lady after receiving the gift were to make investment in Tax Free Bond or in Public Provident Fund, in that situation the impact will not be felt about the provisions relating to clubbing of income. This is because of the fact that the income from Tax Free Bonds as well as the income from Public Provident Fund are completely exempt from income-tax and thus no clubbing of income will virtually take place. 

In the case of the minor child if some amount is received by the minor child for doing some manual work or other work requiring his knowledge or skill, in that situation the provisions relating to clubbing of income will not arise. However, the clubbing of Income provisions would arise in the case of minor children deriving any income out of gift from everyone. However, the sum of Rs. 1500 per annum is exempted from clubbing in one financial year for each child.

Illustration:

Mr. Shyam Kumar made a gift of Rs. 5 lakhs to her wife on their first wedding anniversary. His wife haS invested the money in Bank Fixed Deposit and the sum of Rs. 48,000 is the interest income from such fixed deposit amount. This amount of Rs. 48,000 will be included in the income of Mr. Shyam Kumar in view of the provisions concerning clubbing of income as contained in section 64 of the Income-tax Act. 

Illustration:

Mr. Gaurav Gupta made a gift of Rs. 10 lakhs to his wife on the occasion of their 20th wedding anniversary. After receiving the gift amount his wife has purchased the Tax Free Bonds issued by a Public Sector Company. In this situation there will be no impact of clubbing of income because the amount received as gift has been invested in Tax Free Bonds the income of which is completely tax free. 

Illustration:

Satyapriya has made a gift of Rs. 6 lakhs to his wife. His wife joined a partnership firm with this amount. The share of profit arising to his wife from the partnership firm amounts to Rs. 1,85,000. The clubbing provision will not apply in this case because the share of profit from the partnership firm is completely exempt from income-tax. 

Illustration:

Anurag, a senior executive with a multinational company made a gift of Rs. 2 lakhs to his wife. She invested this in shares of some listed companies and derived dividend income of Rs. 8,500. In this case also the provisions relating to clubbing of income will not apply because the income from dividend is completely exempt from income-tax as per section 10. 

Illustration:

Prasanna gifted one lakh rupee to his wife on the occasion of their first child birth. She invested the entire amount in shares of listed companies. After two years she sold the shares for Rs. 3 lakhs. Here again the question of clubbing of income will not arise because the income from Long-term Capital Gain on sale of the shares in any case is exempt under the Income-tax Law. 

Illustration:

Sita Devgift from her uncle. Entire amount has been invested in Bank Fixed Deposit and her yearly interest income is Rs. 80,000. This income will not be added with the income of the husband because the provisions of clubbing of income will not be applicable as the investments in the Bank Fixed Deposit have not come from the husband. 

Illustration:

Kartik is very intelligent boy. He is just ten years old. He is helping his father by carrying out various computer activities related to his father’s work and he receives a sum of Rs. 5,000 per month from his father towards salary. This amount will not be added to the income of the father because the amount has been paid for the work done by the minor child. 

Illustration:

Suresh, the minor son of Pratap received gift amounting to Rs. 2 lakhs from various friends and relatives. His father and mother have not given any gift. The amount is invested in the bank and interest of Rs. 18,000 is received in a year. This amount will be added to the income of Suresh’s father even when the amount has not been received as gift by Suresh from his father and is received from various friends and relatives. Still the yearly interest will be added to the income of his father because the law provides for taxing the income of the minor child irrespective of the fact that father has not made the gift. However, the sum of Rs. 1,500 will be deducted and only the balance amount will be clubbed with the income of father. 

Illustration:

Paramdeep made a gift to his son, Ansul. The sum of Rs. 50,000 so gifted to Ansul has been invested in a separate PPF Account in the name of Ansul. The yearly interest on the PPF Account will not be added to the income of Paramdeep because the interest income from PPF is completely exempt from income-tax. 

It is, therefore, very important to note carefully the provisions concerning clubbing of income under the Income-tax Law so that the tax payers do not face any problem from the hands of the Income-tax Department. Hence, as far as possible the married lady should avoid receiving gift from husband, father in law and mother in law. Likewise, in the case of a minor child the entire amount of income accruing to the minor child should be added to the income of father or mother whoever has higher income.

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