Many times you transfer assets to a relative like parent or wife or buy assets for a relative especially non-earning family members in their name with your money. This is done either for emotional purposes, providing financial stability to the relative or to save some tax liability. In certain cases, when this asset earns income, you are liable to pay tax on it. This income is clubbed with your other sources of income. (Income Tax Section 60 to 64) Similarly if the asset incurs loss, the loss is also clubbed with your income to calculate your income tax.
Let us look at the situations that are considered as clubbing of income as per the Income Tax Act –
- You are allowed to transfer an asset to your spouse. If this asset earns income, it will be clubbed to your income while computing income tax and you are liable to pay it.
- You can transfer an asset to your child (own legitimate child/ adopted child). You are liable to pay tax on income accrued on this asset. If the parents are divorced, then the income is clubbed with the income of the parent who has custody of the minor child.
- If you transfer an asset to your son’s wife, and there is income earned, that amount is required to be clubbed with your income and you should pay tax on it.
- You can invest in assets in your spouse’s name. For example, you can buy shares or invest in Mutual funds in your spouse’s name. The income earned from these assets needs to be clubbed with your income while filing Tax Returns.
- If you transfer income to another person, this income will be included in your income and be computed for tax liability.
- If you have property in your name and convert it to HUF (Hindu Undivided Family) property, then income earned from this property is to be clubbed with your income for tax computation.
Still looking for ways to save tax?
There are some other ways in which you can reduce your tax liability –
- If you transfer an asset to your parents or siblings, the provision of clubbing income does not arise and you do not have tax liability on the income earned on this asset.
- If you invest in instruments like PPF, life insurance for your spouse and/ or children, your income is eligible for tax deduction under Section 80 C and 80 D of Income Tax Act.
- If you buy health insurance for your parents, you are eligible for tax deduction.
- You can also invest in PPF and Senior Citizens’ Savings Scheme in your parents’ name. You will not be eligible for tax deduction but your money will earn tax-free interest.
- You can gift money to your spouse, siblings or adult children who can invest in PPF. You will again not be eligible for tax deduction but your money will earn tax-free returns.
- Gifts given before marriage to would-be spouse is not considered in clubbing of income.
- Cross Gifts which means you give your brother’s children gifts and he gives your children gifts. Such transfer is also not included in the giver’s income. (this may be counted in tax evasion)
If you would like to read this topic in detail – check this
Blunders people make: I have seen lot of people who invest in the name of spouse or kid but don’t show that in ITR – someday that may land them in tax scrutiny & penalties.
Have you considered clubbing your income provisions? Do ensure that you keep the above mentioned points in mind so that you do not break any laws of the Income Tax Act.