6 things should be kept in mind while clubbing of income
Posted On June 24, 2014 income tax
- Income earned on income shall not be clubbed: seems confusing right? Don’t worry, I will make it easy. If Mr. A transfers house to Mrs. A and Mrs. A has rented it and earned income. Mrs. A, further, invests this rent income in FD and receives interest. In this case, rent income shall be clubbed with income of Mr. A but Interest income on FD shall not be clubbed with income of Mr. A as it is income earned on income.
- Income on accretion of asset shall not be clubbed: Mr. A transfers shares to Mrs. A, Mrs. A receives dividend income. This income will be clubbed in the hands of Mr. A. Now Mrs. A receives bonus shares for shares held by her. Dividend income on those bonus shares shall not be clubbed with income of Mr. A but shall be taxable in the hands of Mrs. A.
- Clubbing provision for interconnected transactions: Some taxpayers are smart and they transfer assets not to relatives but to relatives of friends or third party. In that case also, clubbing provision will apply. Taking one example, Mr.A gifts Rs. 20 lacks to Mrs. P. without consideration and Mr. P gifts Rs. 20 lacks to Mrs. A without consideration. Technically clubbing provision will not apply here but as per judgment of the case of CIT vs Keshavji Morarji ,this tax evasion transaction attracts clubbing provision and income from gift received by Mrs. A shall be clubbed with income of Mr. A and Income from gift received by Mrs. P shall be clubbed with income of Mr. P.
- When husband and wife do not have any income except clubbing income: Mr. A and Mrs. B are working in firm in which both have substantial interest and receive income from said firm. According to clubbing provision when both husband and wife have interest in concern and both are receiving income from it, income shall be clubbed in the hands of person whose income excluding clubbing income is greater. When both husband and wife have no any income except clubbing then it can’t be decide the person whose income is greater and clubbing provision will not apply. Husband and wife will pay tax on own income received from said concern.
- Gain arising from sale of asset: Clubbing provision is applicable for not only income but also for gain on transfer of asset. When asset is transferred without consideration and transferee sells the asset, capital gain arisen from that transfer shall be clubbed with the income of transferor. Similarly if any loss arisen from that transaction, it shall also be clubbed and allowed for set off with other income. If transferor invests in other property during the year, deduction u/s 54 to 54GA should also be allowed while computing capital gain.
- Claim deduction under chapter VI-A: Clubbing income shall be added according to respective head. Transferor can avail deduction under chapter VI-A while calculating income and save tax.