India has a progressive tax system. Meaning, as an individual’s income increases, the tax payable also increases as per the income tax slabs. To avoid paying these increased taxes, a taxpayer may transfer their assets and income to their spouse’s name. To restrict such tax evading practices, the Income Tax Department has introduced ‘clubbing of income’ provisions under Section 64 of the Income Tax Act.
Read on to know what is clubbing of income under Section 64, eligibility and when Section 64 not applicable.
The term clubbing of income means adding the earnings of another individual to one’s income. Most of the time, this includes the income of immediate family members. Further, the term deemed income is the clubbing of income in an individual’s earnings.
According to Section 64 of the Income Tax Act 1961, an individual’s income will include the income of spouse, minor child, etc. For instance, an individual has a total income of Rs. 3 lakh. Further, this total income consists of Rs. 2 lakh salaried income and Rs. 1 lakh of rental income. However, if the individual wants to go below the taxable income limit, then an individual needs to transfer the ownership of the house to his wife’s name. So now an individual’s tax calculation will be on Rs. 2 lakh.
Eligibility criteria for clubbing of income under Section 64 of the Income Tax Act include the following:
There are various scenarios under which clubbing of income is applicable. These are as follows:
Some cases where clubbing of income is non-applicable include:
Except for minor asset transfers made to spouse or daughter-in-law, any other income will not be clubbed with the total income. For instance, Mr Lucky transferred Rs. 5 lakh to his wife, and the wife then invested the amount in a 10% FD. Here, the interest will be Rs. 50,000, which will be taxable on Mr Lucky’s income. Further, Mrs Lucky reinvests the money and receives an interest of Rs. 5000. Now, Mrs Lucky will have to pay the tax for the reinvestment.
Any amount of money the wife saves from daily household expenses will not be applicable for income clubbing. For example, Mrs Iyer saved Rs. 7000 in May from Rs. 50,000 that her husband handed to her for monthly household expenses. Further, he cannot club that amount with this total income.
Money or property that the husband gives in gifts to the wife will not be considered for income clubbing under this section. For instance, before marriage, Mr Will gives Rs. 4 lakh to his fiancé, who is now his wife. This amount will not be clubbed to Mr Will’s income as the money was given before marriage.
If you want to avoid clubbing of income, then follow these steps below:
In the case of clubbed income from a minor child or spouse, the individual can file for ITR in the following ways:
Form ITR-1: If the income of the spouse or minor child is in the form of asset transfers or gifts.
Form ITR-2: In this case, the income has to come from winning lotteries or game shows.
Things an individual should remember while clubbing income are:
Not many know the concept of income clubbing. Further, the Income Tax Department introduced Section 64 of the Income Tax Act to stop the people who try to avoid paying taxes. This makes everything even more complex for people while filing income tax returns. However, if one still wishes to save taxes, one can refer to the techniques mentioned above.
Ans: There is no tax levied on gifting money to the wife, regardless of the amount.
Ans: Section 64 of Income Tax Act allows the inclusion of losses. Moreover, clubbing losses will lead to a reduction in tax liability.
Ans: In order to avoid clubbing of income a husband should avoid giving gifts to his wife in the form of cash.
Ans: If the wife earns an interest higher than the exemption limit, she will be taxed for the income earned through the interest of the FD investment.
Ans: The maximum amount limit for ITR-1 Form is Rs. 50 lakh.
Before you go…
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.