According to the Income Tax laws of India, if the taxable income exceeds the basic exemption limit, every taxable person is liable to pay taxes on his/ her income. However, in certain circumstances, a taxpayer may have to bear the tax burden on the income of another person as well. The provisions of Clubbing in the Indian Income-tax Law have been included to report such income as the taxpayer’s income.
Let us know it through a few examples where the income of others gets clubbed in the hands of the taxpayer, although the income is not earned by him/ her directly:
When a taxpayer, while retaining the ownership of an asset, transfers the income from such an asset to another person by an agreement or in another way, such income will be taxable in the hands of the transferor.
Income of the spouse is required to be clubbed in the hands of the taxpayer if any payment is received by the spouse by way of salary, commission, fees or any other form of remuneration, from a concern in which the taxpayer has a substantial interest (‘substantial interest’ as defined in the Act).
Meaning of substantial interest:- An individual is deemed to have substantial interest if individual or spouse or brother or sister or any lineal ascendant or descendant of the individual holds equity shares carrying not less than 20% voting power or is entitled to not less than 20% of the profits in a concern at any time during the previous year.
However, clubbing of income would not be applicable, if the income of the spouse is related to her/his technical or professional knowledge.
For example, X has a substantial interest in a Company and his wife Y receives a salary from this company, without having any technical or professional knowledge and experience. Here, in this case, the income of Y will be taxable in the hands of her husband X.
But, if Y receives her salary on account of her technical or professional knowledge or experience, at this point her salary would not be considered for the purpose of clubbing of income.
There are some specific clubbing provisions when a taxpayer may transfer any asset without adequate consideration to the spouse or son’s wife (Daughter in law). Income from such an asset is added to the taxpayer’s income if the taxpayer–
For example, the spouse earns the rental income from a house owned in the name of his husband (the taxpayer), the earning would be clubbed with the income of the taxpayer if the said house was transferred in the name of his spouse without adequate consideration. But, for any other relatives other than spouse or son’s wife, there are no similar provisions.
Taxpayers should be mindful of these provisions as even though these incomes are not received directly by the taxpayer, yet they are required to be reported in the taxpayer’s income tax return, as a part of their total annual income. However, it is very important to keep in mind that Non-disclosure of earnings/evasion of taxes intentionally could lead to excessive tax, interest, and penalties. And, you may completely lose your peace by replying to the notices from the Income-Tax Department.
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