As the deadline to file your income tax returns (ITR) gets closer, it is important you do not miss out on small details of income generation, including those made from investments in the name of a non-earning member of the family. It is not unusual to make deposits or open accounts in the name of your spouse who is not earning or your minor children towards their future, but you should be aware of situations where income earned in their name will be taxable to you.
The clubbing of income tax provision was introduced under the income tax act of 1961 under section 60 to 64 so that earning individuals do not evade from tax payment by taking undue advantage of making investments in the name of their family members for their personal gains. In special cases, the income is "clubbed" with an earning member that the person may be dependent on financially.
Cases where clubbing takes place
- If you have retained the ownership of an asset but transferred its income to another person (through agreement or otherwise), the IT act considers it as your taxable income and not that of the recipient.
- Also, if you have transferred the ownership of the asset but kept the ownership revocable, you are liable to pay tax on the income earned from the asset.
- If your spouse is receiving a salary from a company/firm where you hold a substantial interest, it is clubbed with your taxable income. Substantial interest means you hold equity or 20 percent (or more) voting rights in the company or are entitled to 20 percent or more profits made from the business. If both of you are receiving salaries, the person whose taxable income is higher will be liable to pay the taxes for both.
- If the transfer of an asset is made to your spouse or your son's wife directly or indirectly with enough consideration, in a way that the benefit arises to your spouse (immediately or on a deferential basis) the difference is taxable in your hands. Also, an income made from the asset is clubbed with your taxable income.
- If you have gifted money to your spouse (non-earning) to make investments in his/her name, the income made from this investment is clubbed to your taxable income.
- For investments like fixed deposits, savings schemes, made in the name of your minor child, the income from such an investment is clubbed with a parent whose taxable income is higher. In case of a divorce, it is clubbed with the parent looking after the child.
Situations where taxable income is not clubbed
- If your minor child is earning an income from his/her own work/talent/special skills, it is not clubbed with any parent's income.
- If your spouse is working in a business where you hold substantial interest but he/she is receiving a salary for technical or professional knowledge/assistance in the business, he/she will be individually taxed.
- If your spouse chooses to reinvest the income earned from the investments made using your money to earn further returns, it is not clubbed with your taxable income.
- If a parent has transferred money to his/her major child who is not earning, any income made from investing that money is not clubbed with that of the parent.