There are certain occasions when the income of your spouse gets clubbed with your income. So, if you are planning to transfer any of your income or any asset to your spouse to avoid the associate tax on such income, hold on.  There are certain specified situations when the income of both the husband as well as the wife would be clubbed and would be taxed as one entity. In addition to this, there would be only one income tax return for the income earned by the husband and the wife and would be considered as one assessee under the Income Tax Law. Section 64 of the Income Tax Act contains the main provision relating to clubbing of the income of husband and wife.

Transfer of Income

Transferring income or asset to another person could result in the attraction of clubbing provisions under the Indian income tax laws. However, income earned by an individual cannot be clubbed with the income of another person on a random basis while computing total income and also not all income of specified person can be clubbed. As per provisions contained under section 64 of the Income Tax Act, there is some specified income of specified persons which can be clubbed while computing the total income of an individual.

For example, Harsh owns a residential property in South Delhi. He has rented the said residential property for Rs. 50,000 per month and requested the tenant to transfer the rent payable to his wife’s bank account. In this scenario, though the rental income of Rs. 50,000 is being received by his wife, Harsh has to show the rental income as a part of his total income while furnishing his return and to pay the tax thereon since he is the legal owner of the house property.

Remuneration from a concern in which a spouse has a substantial interest:

When an individual receives remuneration by the way of salary, fees, commission or in any other form from any company or organization in which his or her spouse holds substantial interest, then such income earned by the individual shall be clubbed in the income of the spouse.  However, such clubbing provision shall not be applicable where the income is earned due to any technical or professional qualification of the individual. If the individual is technically and professionally qualified for the job then the income shall not be clubbed with the income of the spouse.

Income from assets transferred to the spouse;

While computing the Gross Total Income (GTI) of an individual, all such income arising directly or indirectly, subject to the provision contained under section 27(i) of IT Act, to the spouse of such individual from assets transferred either directly or indirectly to the spouse of such individual for inadequate consideration or in connection with an agreement to live apart shall be included.

If an assessee being an individual transfer any of its asset to his/her spouse, then income arising from such transferred asset shall be clubbed in the hands of the transferor to the extent of the inadequacy of consideration.  Let’s take an illustration to understand this; Mr A transferred his house property to his wife of Rupees. 1,00,000/- but actual consideration was Rs. 15,00,000/-. The said property is fetching a rent of Rs. 1,00,000 annually. Now, in this case, the rental income of Rs. 1,00,000*5,00,000/1500000= 33,333 shall be clubbed in the total income of Mr X.

POINTS TO BE NOTED:

  • If any property is acquired or investment is made by wife out of money provided by her husband for her day to day personal expenses (called pin money), the clubbing provisions shall not be applicable;
  • Where the transferred assets have changed its shape and identification, then income arising from such modified asset shall be clubbed. This can be defined as per the case law of Palletti Srivendvarma Vs. CIT (1995) 216ITR 826(SC). Suppose Mr X gifted shares to his wife and Mrs X sold such shares to purchase a house property, then the income arising from such house property shall be clubbed in the income of Mr X.
  • Where a genuine loan is made to the spouse will not be considered as a transfer.

Therefore, both the husband as well as the wife needs to take due care of the above mentioned provisions relating to clubbing of income so that the income of the husband as well as of the wife is not clubbed.

Furthermore, the biggest disadvantage of this provision is that the income tax burden increases as the income accruing or arising to both of them are taxed as one entity. Hence the slab rates provided in the Income Tax Act goes up so also the exemptions and deductions get further narrowed down.

Read Also:-

S. No. Provisions of Set of and Carry Forward of Losses under Income Tax Act, 1961
1 Clubbing of Your Income with Income of your Spouse
2 Clubbing of income from assets transferred to Son’s Wife
3 Clubbing of income from the asset transferred to Spouse
4 Clubbing of Income on Revocable Transfer of Asset
5 Clubbing of remuneration income of Spouse from a Concern in which other Spouse has Substantial Interest
6 Set Off & Carry Forward of Loss under the head House Property
7 Clubbing of income of a Minor Child with Income of parent
8 Clubbing of Income from Self-acquired Property converted to Joint Family Property & subsequent Partition
9 Clubbing of Income from assets transferred to a person for benefit of spouse
10 Clubbing of Income from Assets Transferred to a Person for the Benefit of Son’s Wife
11 Carry forward & set off of Business Losses other than Speculation Loss
12 Set off and Carry Forward of Capital Loss
13 Set-off and carry forward of Speculative Business Loss
14 Set-off & carry forward of Loss from owning & maintaining racehorses
15 Set off and carry forward of losses of Specified Business | Section 73A

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