Clubbing of Income of spouse and child -Tips to save tax

Many of us invest in the name of our spouse or kids and feel that we can easily avoid taxes. But it is not true in many cases. Because even though the earning is in your spouse or kids name, Clubbing of Income provisions apply and you have to pay the tax. Let us see the applicable rules in this regard.

In this regard, let me separate in two ways. One is let us first consider the clubbing of income provisions applicable to spouse and another to the child.

Clubbing of Income of Spouse

Let us discuss the major provisions of Clubbing Of Income rules in case of a spouse. There are two IT Sections which we have to keep it in mind for clubbing of income provisions in case of a spouse.

1) As per IT Sec.64(1)(IV), there are certain conditions which have to be satisfied.

-The taxpayer is an individual.

-He/She has transferred an asset (other than a house property).

-The asset must be transferred to his/her spouse.

-The transfer may be direct or indirect.

-The transfer must not be in connection with an agreement of divorce settlement or with adequate consideration.

2) IT Sec.27 (which deals with deemed ownership of house property)

Rule 1-

If you transfer an asset to your spouse name without any consideration (directly or indirectly), then income from such asset will be clubbed in your income.

Let us assume Mr.X transfer Rs.1,00,000 to Mrs.X name. In return Mrs.X invest this Rs.1,00,000 into FD. Assume this FD earned Rs.8,000 after a year. This FD is not the income of Mrs.X but it is the income of Mr.X (even though the FD and TDS are in the name of Mrs.X).

I used the word CONSIDERATION in above definition. For that, let me give you an example.

Let us assume Mr.X transfer Rs.1,00,000 worth of an asset to Mrs.X name with the consideration of Rs.25,000 (Mrs.X pay Rs.25,000 to Mr.X for buying an asset). Then, Mrs.X will turn to be the owner of Rs.25,000 of that asset ONLY. Income generated from this Rs.25,000 will be the income of Mrs.X and taxed to her. Rest of Rs.75,000 worth of asset income will be clubbed with Mr.X income.

Rule 2-

Let us assume Mr.X transfer Rs.1,00,000 to Mrs.X. Then Mrs.X invested this in FD which fetch her 8% return per year. So the year end income of Rs.8,000 is the income of Mr.X (as I explained above).

However, assume Mrs.X invested this Rs.8,000 again in some FD which fetch her 8% return per year. So whatever the earning from this Rs.8,000 (i.e Rs.640) is the income of Mrs.X but not the Mr.X.

Rule 3-

The above-said rules are applicable under IT Sec.64(1)(IV) which not deals with house property. But for house property, IT Sec.27 will come into the picture.

Assume Mr.x transferred his house property to his wife Mrs.X without adequate consideration, then in such a case, even the property belongs to Mrs.X, the deemed ownership of property is Mr.X. In future, if Mrs.X sell the property, then the capital gain from such property sale is the income of Mr.X but NOT the Mrs.x

This would, however, not cover cases where the property is transferred to a spouse in connection with an agreement to live apart.

Now let us assume that instead of transferring the house property, Mr.X transferred Rs.50 Lakh to Mrs.X. In return, Mrs.X purchased a flat. The ownership, in this case, is with Mrs.X. However, any rental income or capital gains from this property is the income of Mr.X (even though here the ownership is with Mrs.X and Sec.27 rules not applies).

Clubbing of Income of Child

Here, the child may be minor or major. But rules changes based on the age of a child. Hence, I separate this section into minor and major child.

Clubbing of Income of minor child (less than 18 years old)

The income of minor child will be included in the income of that of a parent whose total income is greater. Hence, it does not mean that anyone like father or mother can club their minor child income as per their wish.

Let us say Mr.X created an FD of Rs.10,00,000 in his minor child name. If such FD earned the interest income of say Rs.80,000 a year. Then such income is Mr.X income.

Also, assume child earning is Rs.1,00,000 and wife earning Rs.5,00,000 and husband earning Rs.4,00,000. In this case, child earning should be clubbed with wife’s income but not with husband’s income. Hence, in total wife’s income changes to Rs.6,00,000 (Rs.5,00,000 self income+Rs.1,00,000 of child income).

However, clubbing provision will not come into the picture in below cases.

1. Income of minor child suffering from any disability of the nature specified under SEc.80U.
2. If the income of such minor child is due to manual work of a child.
3. If the income of such minor child is due to any activity involving the application of his skill, talent or specialized knowledge and experience.

If you included an income of your minor child, then you are entitled to an exemption of Rs.1,500 in respect of each minor child. However, if such minor income is less than Rs.1,500, then such amount is applicable for exemption but not more than Rs.1,500.

If child attains majority during the previous year part of the income earned by the child during his minor stage shall be clubbed in the hands of the Parent.

The minor’s income, in the case of both the parents not alive, can not be assessed in the hands of the grandparents or any other relatives or even in the hands of a minor. A guardian should file a return on behalf of the minor child. Clubbing provision can’t be applicable to guardian also.

Clubbing of Income of major child (equal or more than 18 years)

Clubbing of income provision will not apply to a major child (whether he is earning or not). Hence, assume that you transferred Rs.1,00,000 to your major child. He invested that into an FD and earned Rs.8,000 as an interest income. Such interest income is not your income but it is your major child income.

I tried to show the all rules in simplified format in below image. This will give you an example of how clubbing of income works in case of wife and child.

Few important points for clubbing of income provision-

# You can club negative income also-Suppose you transferred Rs.1,00,000 to your wife. She in return did some investment where she lost around Rs.20,000. Such loss can be clubbed into your income for taxation purpose.

# Clubbing should be under the same income heads-The income will be clubbed in the same head from which it is earned. If income is earned from investing in FD it will come in the category of the  “Income from Other Sources”, if income is earned from the sale of a house it will come under the “Head of Income from Capital Gains”. Then clubbing is considered under the same head of income.

Clubbing of Income of spouse and child -Tips to save tax

Now you understood the basics of Clubbing of Income rules when it comes to spouse and child. Let us now go further and understand how we can save tax.

# Invest in non-working wife name-Suppose you have Rs.1,00,000 and if you invested this in an FD which fetch you 8% per annum, then this interest income of Rs.8,000 is your income. Same way even if you booked the FD in your wife name, then this Rs.8,000 will be your income.

However, if your wife booked that Rs.8,000 FD, then any income arising from that Rs.8,000 will be her income but not your income. As she is not working, then her tax liability turn to be ZERO. If the same is in your name, you might have to pay the tax on such income.

# Give Loan than Gifting-Instead of gifting which again clubbed into your head, you can give a loan to your wife with the nominal interest rate (there is no such rule that to specify the interest rate). Then all such income should be your wife’s income. It will not be clubbed with your income.

The only caution here is that she has to repay the loan and interest to you (OFFICIALLY). But you must have a documentary proof of Loan. A simple letter of Loan with Signatures of both the parties will be enough as a proof.

# Gift to wife or daughter-in-law before your marriage or before your major son marriage-If you transfer money to your wife or daughter-in-law, then the clubbing provisions will apply. However, if you transfer the money before your marriage or before your major son marriage, then there is no such clubbing provision.

You can gift them during the marriage and avoid clubbing of income and they also can save tax if any gift received during the marriage (as per gift rule Refer-Income Tax on Gift in India – Rules and tips to save tax ).

# Gift to your child who is major-As I stated above, if you gift to your child who is 18 years of age or above, then clubbing provisions will not apply. Hence, whatever the income your child earn is purely his/her.

# Gifting in the name of HUF-Clubbing provision applies when you gift to your own HUF. However, clubbing provision not apply when someone gifts to HUF. Hence, if someone trying to gift to you, then better to tell them that to gift to HUF. Then such income is not you own but the HUF members.

# Investing in products like PPF-By investing in products like PPF (which is EEE product) in your spouse or minor child name, then as the maturity proceeds of PPF is tax-free, you will enjoy the tax-free income. Same applies to equity products. (Refer-PPF Account for Minor and Wife – Rules, Tax Benefits and Tricks)

Hope this much information is enough to udnerstand how the clubbing of income works for taxation purpose.