Clubbing on income is a very important provision in the Indian Income Tax Act and it makes sure that individuals do not avoid tax by transferring assets to other people. At the back of queries I received on this subject, here is a small primer on clubbing of income with respect to income from assets transferred to spouse.
Note that Section 60 to 65 of the Income Tax Act covers clubbing on income and is vast but this article concentrates only on tax liability on income from assets which have been transferred to the spouse.
Clubbing on income of spouse – Income from assets transferred to spouse
This rule states that while calculating the total income of an individual, all income that arises directly or indirectly to the spouse of the individual from assets transferred directly or indirectly to the spouse of such an individual shall be included subject to some caveats.
The income from the transferred assets shall not be clubbed together in the below instances :
- if the transfer is for adequate consideration.
- the transfer is under an agreement to live apart.
- if the couple are no longer husband and wives at the time of the transfer or at the time of accrual of income.
If the individual transfers any asset other than a house property to his/her spouse, the income from such an asset shall be included in the total income of the transferor (a person who makes a transfer). A transferee is a person to whom a transfer is made. Note that this isn’t applicable for house property as the transferor is deemed to be the owner of the property and the income from house property is calculated in his/her hands.
Remuneration to Spouse
There is a another rule here. An individual is chargeable to tax in respect of any remuneration received by the spouse from a concern (firm) in which the individual has substantial interest. This provision has an exception. If the remuneration is received by spouse by the application of technical or professional knowledge or experience, clubbing is not applicable.
For example, Mr Money has substantial interest in Hammer Technologies (remember IronMan 2 ?) and Mrs. Money is employed by Hammer Tech without any technical or professional qualification. In this case salary income of Mrs. Money shall be taxable in the hands of Mr Money.
Let us quickly check some scenarios.
House property and the wifey
Suppose a house property is transferred to a spouse without consideration. Since there was no consideration, the transferor still is the owner of the house. So in this case even though the transferee earns rental income, this will be clubbed in the hands of the transferor. Now if the house is sold and capital gain arises, then such capital gain will be first computed in the hands of the transferee and then the same will be clubbed with the income of the transferor. Interesting !!
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Further, if you buy a house in your wife’s name but she has not monetarily contributed in the purchase, then the rental income from that house would be treated as your income and taxed at the applicable rate. The only way if you want to buy a house in your wife’s name but don’t want the rent to be taxed as your income, is for you to loan her the money.
To complete the barter exchange, she can give you her gold and diamond jewelery. (What are you thinking ?).
What happens if one transfers shares to his/her spouse ?
One way to do this is to gift the shares to your wife. A gift to your spouse is not a transfer as per the Indian Income Tax Act. Both you and your spouse will not have to pay any tax for this gift. But note that any profit generated from the shares in the future will be clubbed with your income and then taxed.
Another way to transfer would be to transfer against monetary compensation. In such a case, payment received by the transferor will be subject to capital gains tax.
Investing your income in your wife’s name
Now suppose you invest your money in your wife’s name by purchasing some stocks. Any income made on such investments made in the wife’s name is not her income but will be clubbed with your (transferor) income. You will necessarily have to pay tax on it.
However, while the income from the transferred investment is to be clubbed with the earnings of the transferor, any income earned on the income is not. That is treated as the independent income of the transferee and the tax liability is also hers. Depending on which tax slab she falls in, she will have to pay tax or might be exempted.
Similarly, if you give money to your wife as a gift and she puts it in a fixed deposit, the interest would be taxed as your income.
I recommend that if you have such practical cases in your married life (I am sure you do !), you consult a tax counselor.