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When you are liable to pay tax on another's income
April, 03rd 2019

As per the Indian Income Tax laws, every person is liable to pay taxes on his/ her income, if the taxable income exceeds the basic exemption limit. However, in certain situations a taxpayer may have to pay tax on the income of another person. Clubbing provisions in the Indian income-tax Act (Act) have been included to report such income as the taxpayer's income.

Let us see a few examples where income of others will be clubbed in the hands of the taxpayer, even though the income is not earned/ received by him/ her directly:

Transfer of income without transfer of assets
When a taxpayer, while retaining the ownership of an asset, transfers the income from such asset to another person by an agreement or in any other way, such income will be taxable in the hands of the taxpayer.

For example, Ankit owns a house property in Delhi. He has rented the property for Rs. 25,000 per month. However, he has requested the tenant to make the payment of rent in his father's bank account. In this situation, though the income is received by his father, Ankit has to report the rental income as part of his income, since he is the legal owner of the house property.

Income of the minor child is required to be clubbed with the parent whose income is higher. If the parents are divorced, it is clubbed with the income of the parent who is maintaining the child. Once the income of the minor child is added to one parent's income, the same would continue for future years also, unless the Tax Officer believes it is necessary to change the same. The parent with whom the income is clubbed will be allowed an exemption of lower of the actual amount of income or Rs. 1,500 per annum, per minor child.

For example, Rohit has 2 daughters and he has opened fixed deposits in their names. The fixed deposits earned interest income of Rs. 5,000 each. Rohit should report interest income of Rs. 10,000 as a part of his total income. However, he would be eligible claim exemption of Rs. 3,000 on this income (i.e. 1500 for each child). Hence, the taxable interest income for him from these fixed deposits (on account of the clubbing provisions) would be Rs. 7,000.

However, clubbing of the minor child's income is not required when:
Income arises from manual work or application of skill or specialized knowledge and experience of the minor
If the minor is disabled (based on definition of disability in Section 80U of the Act) and earns an income

Income of taxpayer's spouse
Spouse's income 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).

However, clubbing of income would not be applicable, if income of the spouse is related to his her/his technical or professional knowledge.

For example, Vineet has a substantial interest in a Company and his wife Ankita is receiving salary from this Company, without having any technical or professional knowledge and experience. In this case, Ankita's salary income will be taxable either in her hands or in the hands of her husband, depending upon whose total income (excluding this salary income) is higher.

However, if Ankita had received the said salary on account of her technical or professional knowledge or experience, her salary income would not be considered for the purpose of clubbing of income.

Transfer of property without adequate consideration
There are specific clubbing provisions when a taxpayer transfers any asset without adequate consideration to the spouse or son's wife. Income from such an asset would be added to the taxpayer's income if the taxpayer:

Transfers an asset to his spouse directly or indirectly, without adequate consideration or in connection with an agreement to live apart.
Transfers an asset to the son's wife, directly or indirectly, without adequate consideration.
Transfers an asset to any other person or association of persons, directly or indirectly, without adequate consideration, for the immediate or deferred benefit of his spouse or son's wife,

For example rental income received by the spouse, from a house owned by the taxpayer, would be clubbed with the income of the taxpayer, if the said house was transferred to the spouse without adequate consideration. Similar provisions are not there for any other relatives other than spouse or son's wife.

Taxpayers should be mindful of these provisions as even though these incomes are not received directly by the taxpayer, they are required to be reported in the taxpayer's income tax return, as part of their total income. Non-disclosure could lead to tax, interest and penal consequences in addition to replying to the tax notices.

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