Filing your ITR? Know these rules regarding clubbing of income

Generally, you are required to pay tax on your income. However, under certain circumstances you may be required to club the income of your family member. This may increase your tax liability and if you fail to do so there may be tax implications. Know the condition under which this will happen.

Let’s first understand what is clubbing of income.

Many people earn in the name of their child spouse or parent. But if they are non-earning, don’t think that you can avoid tax on it. As per the Income Tax Act, you are allowed to invest in the name of the family members but any income earned through these investment will be taxable in your hands.

This is called clubbing of income, and is covered under section 60 of the income tax Act.

So, for example if you have bought a property in and have got t registered in the name of non-earning spouse. Later, the property is let out. In such a case, rental income from the property will be clubbed with the income of the earning spouse, or with that person’s income who has actually funded the property purchase, irrespective of whose name it is registered in. Similarly, if you invest in a fixed deposit in your minor child’s name, interest earned on the amount invested will be clubbed with your income. However, in case the income of an individual includes income of her minor child, she can claim an exemption under section 10(32) of ₹1,500 or the income of the minor so clubbed, whichever is less.

When it does not get clubbed

In certain situations clubbing provisions do not apply. In case the transfer of assets has happened with adequate consideration. For instance, if a husband transfers a property valued at ₹15 lakh to his wife, and the wife gives him her jewellery of equal value, any income from the house will be considered as the wife’s income and not the husband’s. Apart from this, the asset is transferred before marriage, no income will be clubbed even after marriage, since the relation of husband and wife should exist both at the time of transfer of asset and at the time of accrual of income. And if on the date of accrual of income, transferee is not the spouse of the transferor (i.e., the relation of husband and wife does not exist), clubbing will not happen. Clubbing of income is only applicable at the first level of income. Therefore, if the money earned from investment made in name of, say, the wife is reinvested and earns an income, that income will be treated as the wife’s and not the husband’s. Such income need not to be clubbed.

Therefore, you must disclose all the income earned by you directly or by way of clubbing while filing the income tax return.