Income tax laws contain certain provisions for associating income with the income of a person other than the person who earned the income. In this article, I will discuss the provisions applicable to individual taxpayers.
Clubbing clause applicable in the event of transfer of assets
Income from assets donated by members to HUF: Although gifts received by a HUF from its members do not fall within the scope of Article 56(2), which provides for the taxation of gifts received by a person if the aggregate of all gifts exceeds the threshold of fifty thousand rupees per annum, however, gifts received from certain specified relatives are excluded from these provisions. To this end, all members of HUF are treated as specified relatives of HUF and therefore there are no tax implications for HUF with respect to gifts it receives from its members, regardless of the value of the gifts. gifts. Although the transaction of member donations by a HUF is not subject to tax, any income from the HUF must be included in the income of the member who donated that asset. Clubbing provisions will apply for as long as HUF exists. In the event the HUF is fully shared, the clubbing provisions will continue to apply with respect to the share of assets transferred to your spouse.
Income of spouse or daughter-in-law: Like gifts received by a HUF from her member, gifts received by a daughter-in-law from her in the parenting laws and spouse of another HUF are also not treated as income under the laws of income tax, as your spouse and in-laws are also covered by the definition. from a specified parent. However, with respect to any asset to be transferred to your spouse or daughter-in-law, the income from that asset must be associated with your income while the relationship continues.
Transfer of assets in revocable assignment or transfer of income without transfer of assets
Where a person transfers income from an asset without actually transferring the asset to the beneficiary, the income received from that asset by the beneficiary must be included in the income of the beneficial owner of the assets. Similarly, where a person transfers an asset which may be revoked by him at any time, the clubbing provisions will apply to the income derived from such transfer. However, clubbing will not apply where such transfer is irrevocable during the transferee’s lifetime.
In all cases where the clubbing provisions apply as a result of the transfer of any asset/income, it is important to note that the clubbing provisions will only apply to income that arises from the asset so transferred and will not apply to investments made from already clubbed income. In addition, the clubbing provisions will apply whether the asset is transferred directly or indirectly. The clubbing provisions will continue to apply even when the transferred asset is converted into any other asset.
In the event that the given amount is invested in a product whose income is tax exempt, such as tax exempt bonds, PPF, etc., although such income will still have to be included in the income of the transferor but n will have no tax impact due as the earnings are tax exempt.
Provisions relating to clubbing not related to the transfer of assets
Passive income from minor children: All income, except income earned by the minor through skill, talent, or labor, must be included in the income of the higher-income parent and must continue to be included even if the income of this parent becomes inferior. than other parents. However, the taxing officer may order that the minor’s income be included in the income of the parent other than the parent in whose income they have been assessed until then. There is a basic exemption of up to 1500 with respect to the income of each of the minor children. The provision relating to clubbing does not apply with regard to a disabled minor child. In the event of separation of the parents, the income will be assimilated to the income of the parent who maintains this minor child. The provisions relating to clubbing will cease as of the year in which the minor becomes of age.
Income resulting for your spouse from certain concerns: In addition to income from your spouse from the transfer of any assets, any income from your spouse in the form of salary commission, fees, or other compensation from a business in which you either have voting rights, or a beneficial interest of 20% or more. However, if the income is earned by the spouse as a result of the application of their technical knowledge or professional qualification, the clubbing provisions will not apply. Thus, in the case of a general partnership of professionals where the two spouses are partners, the income of each of the spouses will be taxed in their hands.
I’m sure the above discussion will help avoid transactions that attract clubbing dispositions.
(The author is a tax and investment expert, and can be contacted at [email protected])