Clubbing of Income of Spouse

Introduction

The idea of clubbing of income of a spouse is significant in the Indian tax system. It is referred to as combining one spouse’s income with another spouse’s income for tax purposes. This occurs when one spouse transfers one’s income to the other, or when one spouse has assets or investments in their name, but the other spouse receives the income from them. This article will cover the salient aspects of the provisions relating to the clubbing of income of spouses.

What is the clubbing of income?

Clubbing of income means combining one person’s income with another person’s income. By using such income-splitting techniques, taxpayers may try and evade taxes.

To lower the overall tax obligation, income-splitting schemes include transferring money from a high-income person to a low-income person. By clubbing income, one can make sure that the tax burden falls on the person who made the money rather than the recipient. Thus, Section 64 addresses these issues.

For more details, you can refer to our blog on Clubbing of Income.

Spouse Income Clubbed

In a variety of circumstances, a spouse’s income may be clubbed with another’s for the purposes of tax. For instance, if a husband gives his wife an asset (a residential property) and she uses the income from such asset (rent from such property) to support herself, the income will be clubbed or merged with the husband’s income.

Similarly, if a wife invests her own money in a financial instrument but her husband receives the return from that investment, the revenue will be added to the wife’s income.

Substantial Interest 

A person is deemed to have a substantial interest in any of the following cases: 

1. For Company: If the individual either individually or jointly with his relatives beneficially holds equity shares having 20% or more of voting power in the company at any time during the previous year.
2. Other than Company: If the individual either individually or jointly with his relatives is beneficially entitled to 20% or more of profits in the company at any time during the previous year.

ACCORDING TO SECTION 64(1)(II) of the Income Tax Act’s general rules, where the income of the assessee arises from his spouse, whether in cash or kind and either directly or indirectly:

1. Salary,
2. Commission,
3. Fee, or
4. Any other type of remuneration,

Further, if it is from a business in which the assessee has a substantial interest it will be counted towards his total income.  

Which income is eligible for clubbing? When a husband and wife both own substantial interests in a business and receive compensation from it, Section 64(1)(ii) states that the income of the spouse with the higher income must be combined with that of the spouse with the lower income before clubbing the two spouses’ incomes. It should be noted that if revenue has already been included in either spouse’s hands, any additional income from that spouse in any subsequent year may not be included in that spouse’s total income without the satisfaction of the Assessing Officer. The opportunity of being heard is to be given to the spouse. 

ACCORDING TO SECTION 64(1)(IV), if a person transfers (directly or indirectly) an asset (other than a home) to their spouse without providing adequate consideration, the income from that item will be combined with the transferor’s own income. Income from the unjustified transfer of real estate will likewise be subject to clubbing regulations; however, in this case, clubbing will be conducted in accordance with Section 27 rather than Section 64(1)(iv). Even if the transferee spouse changes the asset’s form, the clubbing restrictions of section 64(1)(iv) still hold true. The clubbing provisions of section 64(1) (iv) do not apply in certain circumstances.

1. If sufficient thought is given when transferring an asset.
2. If the asset transfer is related to a separation and divorce agreement. 
3. If the asset is transferred prior to marriage, no income will be combined even after marriage since the husband and wife’s relationship must have existed at the time of the asset transfer and the time the income was

INCOME FROM ASSETS TRANSFERRED TO ANYONE FOR THE BENEFIT OF THE TRANSFEROR’S SPOUSE IS SUBJECT TO SECTION 64(1)(VII). 

If an asset is given away without payment to a third party for the benefit of the spouse, the spouse will get the income from that asset to the degree that it is for the spouse’s current or future benefit. If Mr. X conveyed a house to Mr. Y with the instruction that 50% of the rental revenue be used for Mrs. X’s benefit and 50% for others, then the remaining 50% of the rental income would be included in Mr. X’s income. 

INCOME FROM ASSETS TRANSFERRED TO ANYONE FOR THE BENEFIT OF THE SON’S WIFE OF THE TRANSFEROR IS COVERED BY SECTION 64(1)(VIII)

If an asset is given away without payment to a third party for the benefit of the transferor’s son’s wife (after June 1, 1973), the income from that asset is covered, to the extent that it is for the son’s wife’s immediate or future benefit.

Clubbing income can promote fairness and equalize financial resources within a marriage or partnership. It ensures that both partners contribute in proportion to their individual earnings to home expenses and financial goals. This strategy promotes financial transparency and may contribute to the relationship’s overall financial well-being.  

Exceptions to Clubbing of Income of Spouse

There may be income earned by the spouse or any income that can be attributed to the application of technical and professional qualifications of the spouse. In such a case, the income earned cannot be clubbed with the income of the assessee. It shall be part of the taxable income of the spouse only. 

Consequences of Failure to Comply

The tax authorities may take legal action in order to recover the unpaid taxes if the money is not correctly recorded and taxed in the hands of the person who really earned it. Non-compliance may also result in punishments.

Conclusion

The clubbing of spouses’ incomes is a crucial idea in the Indian tax system, to sum up. By using income-splitting techniques, it seeks to stop tax avoidance. It is crucial for taxpayers to comprehend how income clubbing operates and how to prevent it. Taxpayers can make sure that their income is properly reported and taxed by holding their assets and investments in separate and distinct ownership, preventing the indirect transfer of income, and maintaining adequate paperwork and record-keeping.