ITRToday

Clubbing Provisions Under the Income Tax Act

 
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Chandigarh, India -- (SBWIRE) -- 02/14/2014 -- There are many situations where people are liable to pay taxes for the income of someone else. This is known as clubbing of income.

Learning rules regarding Clubbing of Income can help you in saving taxes through many ways. Without such knowledge you may be the loser. As such, it is always better to know the concerned tax rules to handle your situation. One should keep in mind that loss is also taken into account while clubbing.

People have an idea that if they transfer their assets to any of their family members like spouse or minor child, they can avoid paying taxes. To deal with such practices to avoid taxes, some provisions have been incorporated in Sections 60 to 64 of the Income Tax Act.

Clubbing of income takes place in the following cases:

1. Income from assets which are transferred in the name of spouse - Where an asset is transferred by someone in the name of his or her spouse, otherwise than for a valuable consideration or in connection with legal separation, the income from the said asset is considered to be the income of the transferor. The Clubbing rules do not apply in case such transfer of assets takes place before marriage.

2. Income from assets transferred in the name of wife of son - If somebody transfers any asset otherwise than for a valuable consideration to the wife of his or her son; the income from the said asset is added to the income of the transferor.

3. Income of a minor - The income of minor is generally added to the income of his parents. Income is normally added to the income of that parent having higher income. Child includes both step child and adopted child for the purpose of the section.

There are two exceptions to this rule: (1) Income of any minor who is suffering from any disability as provided in Section 80U of the Income Tax Act such as physical disability or total blindness or in case both his parents are dead;

(2) In case the minor earns by means of manual work or activity by applying his skills or his talent etc.

When clubbing of income is done, the same will be added to the income of that parent in the following years.

4. Clubbing provisions of HUFs - The clubbing provisions are applicable when someone transfers a self acquired property to a HUF without consideration that is in the form of gift or transfers at a rate lower than the market rate. In such cases, the income from the said asset is added to the income of that person for the purpose of tax, and is not added to the income of the HUF. It is provided in section 64(2) of the Income Tax Act.

How to avoid Clubbing of Income legally?

1. Gift before the marriage - As clubbing applies after marriage, one can plan before and make a gift before the marriage. The gifts received at the time of the marriage would enable the bride to be separately assessed so that they are not clubbed with the income of her husband or in-laws.

2. Giving a loan - If somebody gives loan to his or her spouse or child at a reasonable interest upon it, income from such amount is not be clubbed with his or her income. But the interest amount should be paid regularly and the original amount has to be returned.

3. For investment in the name of maturing after 18th birthday: Making investments in the name of child which matures after he or she attains majority, does not attract clubbing of income rules. So one can make investments which mature after the child attains majority.

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