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Clubbing of Income: An essential part of Tax Filing

Garvit Dave 
Updated on 09 April 2021

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Now that we know the scenarios which lead to clubbing of income, we could efficiently work around this very premise to save taxes. There is a fine line of difference between tax saving and tax evasion, spilling over from one to another could mean moving across - something absolutely legal to something completely illegal. Hence, one needs to understand the nuances and ensure that we do not encroach and move over this thin line of difference.

Income derived from Gift

If an individual makes a gift in cash or by cheque to his spouse and that money is utilized by the spouse for purchase of an asset. The income earned by the spouse from that asset will not be clubbed in the income of the individual. However, such gift should not be received by nearest relatives.

Transfer of asset to would-be spouse

In order to invoke clubbing provisions there must be relation of husband and wife. Hence, if a person transfers asset to his would-be spouse before marriage income arising from such asset will not be included in the income of transferor.

Negative Income

Negative income is also income. Under the Income Tax Act income does not mean positive income only. The term income includes negative income or loss also; this can be used effectively, for example, if the wife has been dabbling in equity shares and incurs short term capital losses, the husband can include that in his income as part of the clubbing of income requirement and set-off his capital gains against such capital losses. The Capital losses, if one is unable to set-off in the same year, the same can be carried forward to subsequent 8 years’, to set-off against capital gains.

Earnings of Minor child attributable to talent

The income of minor child is clubbed with the parents’ income only if the share of parent’s income is greater than that of the minor child and if the earnings of the minor child are attributable to the talent of the child, then one need not club the income. The child will become the assessee in such a case.

Creating a trust for the minor child’s earnings

If a trust is created for the benefit of minor child and income during minority of child is being accumulated and added to corpus of trust and income from increased corpus is given to the child after attaining majority, clubbing provisions are not applicable.

Asset acquired by means of loan

If a loan is extended to one’s spouse, and an asset is acquired by such means, then the income derived from such asset does not qualify for clubbing of income. Thereby, loan is not transfer for the purpose of this section. A reasonable interest should be paid back in such scenario and such repayment needs to be shown as Interest from other sources in the income filing of the husband.

Now that the tax filing season is over, you are probably in no mood to relive these aspects, but it is important to learn the niceties through the year and not just scurry over the last few days of tax filing.

Summary:

1. Clubbing of income is an essential part of Tax filing.

2. Spouse’ and minor child’s income is clubbed if they are not individually assessed for their income.

3. Transfer of asset and income derived there from would be clubbed with the income of the transferor.

4. Negative income can also be clubbed and used to reduce the taxability of the assessee.

5. There are certain exceptions to clubbing of income which are completely legal.




Category Income Tax
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Garvit Dave 

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