What are Income Clubbing Provisions and Tax Implications
Manish Chauhan 96 Comments
I have invested some money in Fixed Deposit in the name of my wife as she is not earning any income. Will she have to pay tax on this? This is an innocent questions because of inadequate knowledge of Tax Provisions on Clubbing of Income and how it attracts tax liabilities. Let us see some Must know tax rules for Clubbing of Income.
Top rules of Clubbing of Income
- Income of a minor child is added to husband or Wife’s Income depending on whose total income is greater. So if Child earns Rs. 1 Lacs and Wife is earning 5 lacs and Husband is earning 4 lacs, then the income of Child will be added to Wife’s Income and it will be 6 lacs of income for Wife and it will be taxed accordingly. Do you think you can live with 90% of your Salary ?
- If you invest money in your Minor Child’s or Spouse’s name then all the income earned from that investment will be clubbed into your own income. The main thing to note here is who ever is the original owner of money will be taxed on the income.
Exception: Income of a minor child shall not be clubbed and is taxable if the child is suffering from a disability (under Section 80U) such as physical disability, complete blindness or if he earns the income through manual work or any activity involving application of his skills or talent or if both his parents are not alive.
- The compounded income is not subject to clubbing. Which means that the income arising from the income which is clubbed is not clubbed. So, if Ajay invests 30 Lacs in an FD in his Wife’s Name, suppose the Interest on this FD comes earns Rs. 2.4 Lacs and the interest from this FD will be included in Ajay’s income, but any income which comes from this interest of 2.4 lacs will be considered as his Wife’s income and not Ajay’s income and hence will not be clubbed back to Ajay’s income. So if his Wife uses this Rs. 2.4 lacs and makes an income of 1 lacs from it, then this 1 Lac will not be considered in Ajay’s income. Do you know How to find the Best Fixed deposit ?
Some Tips Use can use to save Tax
#1: For High Net Worth Individuals
If you are a High Net worth Individual and your Spouse does not Work. you can make investment on his/her name. So that the income which comes from the income arised from that investment is at least not taxed.
Example. If Robert invests 50 Lacs in Stocks and Earns 20 Lacs. It will be considered as His income and Taxed and now if he invests this 20 Lacs in FD. all the Interest he gets is also taxed. But If he Invests this 50 lacs on his Wife name. the 20 Lacs income generated will be taxed as his income. but then when that 20 lacs is invested in FD. all the interest coming from that will be treated as Wife income and If Wife is not doing anything. Her Total income will just be this interest. around 1.6 Lacs considering 8% interest and hence It will not be taxable at all as
its below the limits .
#2 Invest on your would-be-Wife or Son’s-Would-be-Wife name
Tax Clubbing rules do not apply when you invest money on some one’s name before Marriage (only your would-be and Son-would-be, not your-friends-would-be). So Any income earned from that investment will not be clubbed within your Income.
Example. If Manish is going to be married (thanks you guys) and He wants to invest 20 Lacs in an FD. He can do a simple tax trick. He can invest this money on his would-be-wife name. Now by doing so. all the interest coming from this FD will be considered as his wife Income and if her total income comes under minimum limit. She will not pay any tax on this. Where as If he invest this 20 Lacs on his own name or in his wife name after marriage. The interest will be taxed .
#3 Make sure the Investment on your Child Matures after their 18th Birthday
Clubbing Rules applies only for Minor Child’s. Its not applicable for Children above 18th. So make sure your Investments on Child Name mature after they are 18th. so that any income which arise from it is not your income. Read why you should open a PPF account even if you dont need it .
Example. So if you have a child aged 12 and you are planning to buy a Bond for 5 yr on this name. It will mature when child is 17 and hence will be taxed in your hand. better extend the Tenure by 1 yr and make it to 6 yr or 6.5 yr, so that The income arised from it is Child income and not taxed in your Hands .
#4 Give a Loan to your Spouse or Child. not a Gift
Clubbing Rules does not apply for genuine Loans Given to your Spouse or Child. So instead of just Gifting some money or Doing investment on their name, give Loan to them which they can use to invest them self. All the income from those investments will not be clubbed in your income. Make sure that you have a documentary proof of Loan. A simple letter of Loan with Signatures of both the party will be enough as Documentary Proof. no need to run for Lawyers for these.
#5 Create a HUF for Family investments and Family Properties
If you have a Joint or Big enough Family. Its better to Create a HUF. so that then all the investment which are for whole family and all the assets which belong to whole Family are on HUF name. in that case HUF will enjoy all the Deductions and exemptions just like an Individual. I don’t have much idea about HUF more than this. so please control yourself before shooting detailed questions on HUF
Knowing Clubbing of Income rules can help you in saving your Tax in different ways and Without the knowledge you may also loose many times. So better use these Tax rules to make best use of your situation.
Note. There are many exceptions and details in Clubbing Rules which are not covered here. These are just high level rules and not detailed rules. So please handle with Care. For more Tax related Articles, Visit Taxguru.in
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