Investing in Wife name may NOT help you save Tax: Clubbing of Income

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A lot of people try to act smart and divert their own income in their wife’s name so as to reduce the tax burden. People normally do this if the wife is not working or is in a lower tax bracket as compared to the husband.

However, this is one of the biggest blunders which people do due to lack of knowledge of the Income Tax laws. As per the provisions of the Income Tax Act, a person is taxed:-

  1. For his own Income, and
  2. For the income received by somebody else (in cases where Clubbing of Income applies)

As a person can be taxed for the income received by somebody else as well,  it is very important to understand the law regarding Clubbing of Income i.e. cases where a person can also be taxed for the income earned by somebody else.

What is Clubbing of Income?

Clubbing of Income means that the Income of some other person would also be included in your Income. You would be required to pay tax on such Income of the other person.

The provisions of clubbing of Income were introduced by the Govt so as to ensure that a person does not try to reduce his tax liability by splitting his income in different names.

The provisions of Clubbing of Income are not applicable in normal cases and are applicable only in certain special cases. These special cases where the provisions of clubbing of Income are applicable are mentioned below.

What are the cases of Clubbing of Income?

Clubbing of Income is applicable in the following cases:-

  1. Transfer of Income without Transfer of Asset
  2. Income from Assets transferred to Spouse without adequate consideration
  3. Income from Assets transferred to Son’s wife without adequate consideration
  4. Revocable Transfer
  5. Minor Child’s Income
  6. Remuneration received by Spouse from entity in which Individual has substantial interest
  7. Transfer of Asset to HUF
  1. Transfer of Income without Transfer of Assets – Section 60

As per the provisions of Section 60 of the Income Tax Act, if a person owns any asset and he transfers the income generated through this asset to anybody (whether relative or non-relative) without transferring the asset, such income would be taxed in the hands of the owner of the asset and not in the hands of the person who is receiving the income.

For eg: Karan Batra owns a commercial property in Connaught Place which he has given on Rent to Microsoft for Rs. 10,00,000 per month. He transfers this rent to his friend and tells Microsoft to directly pay the Rent to his friend and not to him.

In the above mentioned case – the provisions of Clubbing of Income under Section 60 would be applicable as the property is owned by Karan Batra but the rent from property is received by his friend. And therefore, this Income would be taxed in the hands of Karan Batra and not in the hands of his friend.

  1. Income from Assets transferred to Spouse without adequate consideration – Section 64 (1)(iv) & Section 27

If an Individual transfers any asset to his/her spouse without adequate consideration – then the income from such asset would be clubbed with the income of the individual who has transferred the asset.

Money is also considered as an asset so if you gift your wife some money – the provisions of clubbing of income would still be applicable.

In such a case – the asset/money transferred to the spouse can be considered as a gift and is tax free at the time of receipt. However, the income generated from this gift would be taxable in the hands of the person who has made the gift and not in the hands of the person who has received the income.

The provisions of Clubbing of Income would be applicable even if the form of asset is changed by the receiver of gift.

For eg: Rohit Sharma gifts his wife Rs. 50 Lakhs and his wife purchases a property from this money. The property earns Rent of Rs. 3.5 Lakhs per annum. The tax treatment in this case would be as follows:-

Particulars In the hands of Husband In the hands of the Wife
Gift of Rs. 50 Lakhs No impact Tax-Free as this is a gift from a Relative
Rent of Rs. 3.5 Lakhs earned on this Property Clubbed in the hands of the husband Non-taxable in the hands of the wife

Cases where Clubbing of Income would not be done on Gift to Wife
The clubbing of income provisions would not be applicable on account of income from assets transferred to spouse in the following cases:-

  1. If the transfer of asset is for adequate consideration;
  2. If the transfer of asset is in connection with an agreement to live apart;
  3. If the asset is transferred before marriage, no income will be clubbed even after marriage, since the relation of husband and wife should exist both at the time of transfer of asset and at the time of accrual of income. However, in this case – the gift (i.e. Rs. 50 Lakhs) would get taxable as the relation of husband and wife did not exist at the time of making the gift.
  4. If on the date of accrual of income, transferee is not spouse of the transferor (For eg: Divorce)

3 Income from Assets transferred to son’s wife (Section 64(1)(vi)

If an individual transfers his/her assets to his/her sons wife (i.e. daughter in law) otherwise than for adequate consideration, then the income from such asset would be clubbed with the income of the individual who had made the gift (i.e. father in law/mother in law).

If the asset is transferred before the marriage of son, no income would be clubbed even after marriage, since the relation of father in law/ mother in law and daughter in law should exist both at the time of transfer of asset and at the time of accrual of income. However, the gift in itself would get taxable as the relation didn’t exist.

If the relation of father-in-law/ mother-in-law and daughter-in-law didn’t exist (i.e. Divorce) on the date of accrual of income, then the provisions of clubbing of income would not apply.

4 Revocable Transfer (Section 61 & Section 62)

As per Section 61, if a transfer is held to be revocable, then the income from such an asset is taxed in the hands of the person making the transfer.

However, the provisions of clubbing of income would not be applicable in the following cases:-

  1. Transfer by way of a Trust which is not revocable during the life time of the beneficiary.
  2. Transfer which is not revocable during the lifetime of the transferee.

Meaning of Revocable Transfer
A transfer is deemed to be a Revocable transfer if:-

  1. It contains any provision for the retransfer directly or indirectly of the whole or any part of the income or assets to the transferor
  2. It, in any way, gives the transferor a right to reassume power directly or indirectly over the whole or any part of the income or assets

5 Minor Child’s Income (Section 64(1A))

As per Section 64(1A), the income of the minor child is clubbed with the income of his/her parent.

However, the income of the minor child earned on account of manual work or any activity involving application of his/her skill, knowledge, talent, experience etc will not be clubbed with the income of the parent of such minor. It is important to note here that the interest earned by the minor or the growth of assets of the minor, which were generated from the income of the minor would be clubbed with the income of the parents.

The income of the minor would be clubbed with the income of that parent whose income (excl minor son’s income) is higher. In case the marriage of the parents does not sustain, then minor’s income would be clubbed with the income of the parent who maintains the minor.

In case the minor child’s income is clubbed with the income of the parent, then in such a case – the parent can claim an exemption of up to Rs. 1,500 under Section 10(32).

The income of a minor would not be clubbed with the income of the parent in case the minor child is suffering from a disability specified under Section 80U.

Examples:- Mr. Tendulkar has 2 minor sons – A & B. A is a cricketer and B is suffering from disease specified under Section 80U. The income of A&B and their taxability is as follows:-

Income Taxability
Income of minor son A from Cricket Matches This Income would be taxed in the hands of minor son A and not clubbed as this income is earned by the minor child on account of a skill.
Bank Interest earned by minor son A The Bank Interest would be clubbed with the income of the parent. The parent would be eligible to claim exemption of Rs. 1500.
Bank Interest earned by minor son B The Bank Interest would not be clubbed with the income of the parent as he is suffering from a disability specified in Section 80U.

In the above mentioned example, the income of minor son A would not be clubbed with the income of the parent as the income earned by son A is because of a skill. In this case, this income would be taxed in the hands of son A itself and he would be able to take the benefit of Income Tax Slabs as well.

The minor son A would also be required to apply for a PAN Card No. The procedure for application of a PAN Card of a minor is explained in this article:-

6 Remuneration received by Spouse from entity in which Individual has Substantial Interest

The remuneration (i.e. Salary) received by the spouse from an entity in which the husband is having substantial interest is clubbed with the income of the individual.

However, the income shall not be clubbed in cases where the spouse possesses technical or professional qualifications and the income is solely attributable to the application of technical knowledge or experience.

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 a concern other than company)

7 Transfer of Asset to HUF (Section 64(2))

If an individual being a member of HUF, transfers his property to the HUF otherwise than for adequate consideration – then the income from such property would be clubbed with the income of the person who has made the gift.

In case the HUF gets partitioned and such property gets distributed amongst the members of the family – in such a case, the income derived from such property by the spouse of the transferor would be clubbed with the income of the individual and would be charged to tax in his hands.

Till how long would the Income keep on getting clubbed?

Only the 1st income would be clubbed and not the subsequent incomes. This can be explained with the help of an example.

Mr. Bachchan gifts a property to Mrs. Bachchan worth Rs. 10 Crores. Mrs. Bachchan gives it on Rent and starts receiving Rs. 50 Lakhs per annum. Mrs. Bachchan reinvests this Rs. 50 Lakhs in a Bank FD and receives Rs. 4 Lakhs per annum as the Bank Interest.

The tax treatment in this case would be as follows:-

Particulars In the hands of Husband In the hands of the Wife
Property gifted worth Rs. 10 Crores No impact Tax-Free as this is a gift from a Relative
Rent of Rs. 50 Lakhs earned on this Property Clubbed in the hands of the husband Non-taxable in the hands of the wife
Bank Interest of Rs. 4 Lakhs No impact Taxed in the hands of the wife

The Bank interest of Rs. 4 Lakhs would be taxed in the hands of the wife as only the 1st Income is to be clubbed. The income on income i.e. Rs. 4 Lakhs on Rs 50 Lakhs would not be clubbed.

How to avoid Clubbing of Income on Gift to Wife?

As explained above only the 1st income is to be clubbed and not the subsequent incomes. So if you wish to generate income in the hands of the wife without attracting the provisions of clubbing of income – you should very carefully plan the transactions.

This can be done by generating exempt incomes as the 1st income in the hands of the wife. This can again be explained with the help of an example:-

Particulars In the hands of Husband In the hands of the Wife
Husband gifts wife Rs. 1 Crores No impact Tax-Free as this is a gift from a Relative
Wife invests this amount in Mutual Funds and earns Long Term Capital Gains of Rs. 30 Lakhs Clubbed in the hands of the husband. However as Long Term Capital Gains is an exempt income – it would not increase the tax burden in the hands of the husband. Non-taxable in the hands of the wife
Wife invests this Rs. 20 Lakhs in FD and earns Rs. 2 Lakhs as interest No impact Taxed in the hands of the wife

The tax planning implemented in the above case is that the money is invested in earning exempt incomes which would neither increase the tax burden of the husband nor the wife.

There are several types of incomes which are considered as Exempt income and the most popular of these exempt incomes are:

  1. Long Term Capital Gains on Sale of Shares & Mutual Funds
  2. Interest on PPF Account & PF Account
  3. Dividends received from Shares & Mutual Funds up to Rs. 10 Lakhs
  4. Tax Free Bonds
  5. Agricultural Income
  6. Capital Gain Exemptions on sale of Property

How to claim TDS in case of Clubbing of Income?

In case of clubbing of income – the person who is receiving the income is different from the person who is paying the tax. And therefore the TDS should be claimed by the person who is paying the Tax and not the person who is receiving the income.

This can be explained with the help of an example. Mr Dhoni gifts Rs. 1 Crore to Mrs. Dhoni and Mrs Dhoni subsequently does a FD from this amount and earns Rs. 6 Lakhs as interest. The Banker is paying the interest to Mrs. Dhoni and therefore deducts TDS @ 10% from Mrs. Dhoni’s income and deposits the same with the Income Tax Dept.

However, in this case – it is liability of Mr. Dhoni to pay the Income Tax and not Mrs. Dhoni as the provisions of clubbing of income are applicable in this case.

Therefore, in this case – Mrs. Dhoni should furnish a declaration under Rule 37BA with the Bank that the TDS should be deducted and deposited in the name and PAN Card No. of Mr. Dhoni.

On receipt of this declaration, the bank will not deduct the TDS in the name of Mrs. Dhoni but will do the same in the name of Mr. Dhoni.

Other Relevant Points regarding Clubbing of Income

  1. Although the 1st income is taxed in the hands of the other person, but the money remains with the person who has received the payment and he can reinvest it again.
  2. Provisions of Clubbing of Income are not applicable in case of Income of Major Child or Parents. Therefore, if you gift some money to your parents or your major son or major daughter – the provisions of clubbing of income would not be applicable in this case.
  3. In case the first income is a loss, the loss would also be clubbed.
  4. In case any money is given by the husband to the wife for household expenses (called Pin money) and wife saves some of this money and acquires an asset – the provisions of clubbing of income would not be applicable in this case as household savings are not treated as gift by husband. [ Dalmia v. CIT {1982} 133 ITR 169 (Del)]
  5. Clubbing of Income would not be applicable in case the amount is given on Loan.
  6. Income from assets transferred by a Non-Resident Individual to his wife would be clubbed only if the income from such asset accrues and is received in India.[CIT v. F.Y. Khambaty [1986] 159 ITR 203 ( Bom)]
  7. In case a trust is created for the benefit of the minor child without any right to enjoy the same during the minority but deferred to a date after he attains majority, the income could not be aggregated since there is no benefit to the minor at all during his minority. However, the trust would be assessable on its income in the hands of the trustee.

Karan is CA by Qualification with the rare distinction of being awarded All India Rank 22. He is also the founder of this website and loves to help people with their Tax Queries.