Clubbing on income is a very important provision in the Indian Income Tax Act and it makes sure that individuals do not avoid tax by transferring assets to other people. At the back of queries I received on this subject, here is a small primer on clubbing of income of spouse with respect to income from assets transferred to spouse.
Note that Section 60 to 65 of the Income Tax Act covers clubbing on income and is vast but this article concentrates only on tax liability on income from assets which have been transferred to the spouse.
Clubbing on income of spouse – Income from assets transferred to spouse
This rule states that while calculating the total income of an individual, all income that arises directly or indirectly to the spouse of the individual from assets transferred directly or indirectly to the spouse of such an individual shall be included subject to some caveats.
The income from the transferred assets shall not be clubbed together in the below instances :
- if the transfer is for adequate consideration.
- the transfer is under an agreement to live apart.
- if the couple are no longer husband and wives at the time of the transfer or at the time of accrual of income.
If the individual transfers any asset other than a house property to his/her spouse, the income from such an asset shall be included in the total income of the transferor (a person who makes a transfer). A transferee is a person to whom a transfer is made. Note that this isn’t applicable for house property as the transferor is deemed to be the owner of the property and the income from house property is calculated in his/her hands.
Remuneration to Spouse
There is a another rule here. An individual is chargeable to tax in respect of any remuneration received by the spouse from a concern (firm) in which the individual has substantial interest. This provision has an exception. If the remuneration is received by spouse by the application of technical or professional knowledge or experience, clubbing of income of spouse is not applicable.
For example, Mr Money has substantial interest in Hammer Technologies (remember IronMan 2 ?) and Mrs. Money is employed by Hammer Tech without any technical or professional qualification. In this case salary income of Mrs. Money shall be taxable in the hands of Mr Money.
Clubbing of Income of Spouse – Let us quickly check some scenarios.
House property and the wifey
Suppose a house property is transferred to a spouse without consideration. Since there was no consideration, the transferor still is the owner of the house. So in this case even though the transferee earns rental income. But his will be clubbed in the hands of the transferor. Now if the house is sold and capital gain arise. Then such capital gain will be first computed in the hands of the transferee. The same will be clubbed with the income of the transferor. Interesting !!
Further, if you buy a house in your wife’s name but she has not monetarily contributed in the purchase, then the rental income from that house would be treated as your income and taxed at the applicable rate. The only way if you want to buy a house in your wife’s name but don’t want the rent to be taxed as your income, is for you to loan her the money.
To complete the barter exchange, she can give you her gold and diamond jewellery. (What are you thinking ?).
What happens if one transfers shares to his/her spouse ?
Clubbing of income of spouse – One way to do this is to gift the shares to your wife. A gift to your spouse is not a transfer as per the Indian Income Tax Act. Both you and your spouse will not have to pay any tax for this gift. But note that any profit generated from the shares in the future will be clubbed with your income. And then taxed.
Another way to transfer would be to transfer against monetary compensation. In such a case, payment received by the transferor will be subject to capital gains tax.
Investing your income in your wife’s name
Now suppose you invest your money in your wife’s name by purchasing some stocks. Any income made on such investments made in the wife’s name is not her income. It will be clubbed with your (transferor) income. You will necessarily have to pay tax on it.
However, while the income from the transferred investment is to be clubbed with the earnings of the transferor, any income earned on the income is not. That is treated as the independent income of the transferee and the tax liability is also hers. Depending on which tax slab she falls in, she will have to pay tax or might be exempted.
Similarly, in clubbing of income of spouse, if you give money to your wife as a gift. She puts it in a fixed deposit, the interest would be taxed as your income.
I recommend that if you have such practical cases in your married life you consult a tax counselor.
@Radhey,
Good article, cleared some doubts. I had a doubt on the transfer of shares and was thinking to do the same but since it would clubbed into my income won’t make much sense i guess.
Even the gift given to wife which is invested in FD would be clubbed under my income, hmmm not fair though.
Sir, The article is on clubbing of income so the picture should have one male hand as well, no? 🙂
@Vivek,
Hmm, good catch, even i had thought about the same thing.
@Rakesh
haha, Radhey is not going to like us being so cynical 😉
Hi Radhey, what does it exactly mean: –
The income from the transferred assets shall not be clubbed together in the below instances “if the transfer is for adequate consideration.”
How does IT define “adequate consideration”?
@Vivek,
Adequate Consideration – Clauses (iv) To (viii) of Sub-Section (1)
The words adequate consideration denote consideration other than mere love and affection, which, in the case of a wife, may be presumed. When the law insists that there should be adequate consideration and not good consideration, it excludes mere love and affection. There may be good consideration to support a contract; but adequate consideration to avoid tax is quite a different thing – Tulsidas Kilachand v. CIT [1961] 42 ITR 1 (SC).
@Rakesh,
I am still able to understand. What does it mean “other than mere love and affection”?
Can someone explain in simple english please?
@Vivek,
I think by the meaning of “other than mere love and affection” it states that there should be a contract or agreement done between husband and wife for transfer of property.
Let’s hear for experts comments.
@Rakesh, Guys, somethings better go to the experts – the tax consultants !
Radhey, I have too many questions on this article. I will be posting them separately to maintain a separate thread.
From Mr. Money example: –
“Mr Money has substantial interest in Hammer Technologies”
What do you mean by “substantial interest”? Does it mean share holding of Hammer Technologies? If yes, what percentage is considered as substantial?
@Vivek,
Good you posted each items separately, this article is a bouncer for me. Once Radhey replies to individual comments we will get more clarity.
@Rakesh, Yea too many questions in one comment I’d have lost track myself.
@Vivek,
Got this from the net.
Substantial Interest: An individual is deemed to have substantial interest if he beneficially holds equity shares carrying not less than 20% voting powering case of a company or is entitled to not less than 20% of the profits in case of a concern other tan a company , at any time during the previous year.
@Rakesh,
This is very helpful, thanks Rakesh. So, I was right in terms of being a shareholder but wasn’t aware of the minimum percentage. Good to know. Thanks again!
@Vivek,
Your welcome, i got that from the income-tax site.
Substantial Interest – 20% or more shareholding
From house property: –
“If the house is sold and capital gain arises, then such capital gain will be first computed in the hands of the transferee and then the same will be clubbed with the income of the transferor.”
Suppose the house is sold for a capital gain of 5 lakhs. Since income of wife is now taxable, would she need to pay tax? And after that same amount is added to husband’s income as well? How is taxation handled in this case?
@Vivek K, From what I understand, the tax will be COMPUTED in the hands of the transferee, so 5 lakhs was calculated in the hands of the wife but the 5 lakhs will get added to the husband, not the wife.
@TheWealthWisher, Is it true in case the house was gifted to wife from husband?
From house property again: –
“The only way if you want to buy a house in your wife’s name but don’t want the rent to be taxed as your income, is for you to loan her the money.”
How do you provide the evidence of this loan transaction?
@Vivek,
I think you can make this agreement on a Rs.100 stamp paper and include all the details.
@Rakesh,
I don’t think mere 100 Rs stamp paper would be enough. It should be stamped by notary or registered somewhere.
Radhey, can you confirm please?
@Vivek K, We need a tax expert here I guess.
About gifting of shares to wife: Is there any limit to the transfer of amount of shares or their monetary value?
@Vivek,
I don’t think there is any limit for the same. A tax consultant had told me the same a couple of years ago.
@Rakesh, I will be surprised if there is no limit on shares because generally there is a limit of 5 lakhs for monetary gifts.
@Vivek,
As per income tax act, Gifts received from specified relatives are exempt from income tax, and there is no upper limit also.
@Rakesh,
You are right. I got confused with the gifting limit of VRS.
From investing your income in your wife’s name: –
“However, while the income from the transferred investment is to be clubbed with the earnings of the transferor, any income earned on the income is not.”
What is income earned on income? Can you give an example please?
I think this answers the above question
I open an FD of Rs. 2 Lakhs in my wife’s name, and the interest earned on it is Rs. 30,000. This Rs. 30,000 would be added to my income for the computation of income tax.
However, when my wife invests this Rs. 30,000 in another FD and earns Rs. 3,000 as interest on it, this is considered to be her own income, and is not clubbed with my income.
Let’s see what other experts have to say.
@Rakesh,
Ah, makes sense now. Let’s wait for Radhey to confirm and may be he can give more examples apart from FD.
@Vivek,
Yes, getting more examples will clears our doubts.
@Rakesh, I would have given the same example. 🙂
While the article talks mostly about paying tax on clubbed income, I hope the losses will qualify for deductions we well, where applicable.
@Vivek,
Exactly, loss will be qualified for deductions.
@Rakesh, I hope so but would like an expert to confirm as well.
@Vivek K, When clubbing of income is applicable, loss is required to be clubbed in the same manner as income.
Such clubbed loss can be set off and carried forward, which is another article please !
@TheWealthWisher, Thanks Radhey for the confirmation. How many articles you have in your list now? 🙂
@Vivek K, LOL, lots man !
@TheWealthWisher, Can we help with some basic ones?
@Vivek K,
Best term plans 2012
Claim settlement ratios from IRDA report (with focus on specific to critical illness policy)
Which is the best DP ?
What documents are required for insurance claims adn how to file ?
Best debt funds 2012
How to start investing in Mutual Funds.
When to sell and buy MFs ?
How to select a MF ?
Critical Illness comparison from insurers
Different charges of a MF
Carry forward of losses under IT Act
@TheWealthWisher, Whoa! you got a long list. I will pick up the MF ones, it is something I am familiar and comfortable with.
I shall mail you once I write something and iteratively we can finalize the article.
@Vivek K, Appreciated Vivek, you are a true reader.
Here’s an interesting scenario –
“If an individual makes a gift in cash or by cheque to his spouse and that money is utilized by the spouse for purchase of an asset . The income earned by the spouse from that asset will not be clubbed in the income of the individual.”
@Rakesh,
I think this is treated similar to long term capital gain on selling property and then reinvesting the same money to save tax.
@Vivek,
Yes, could be, though they have not mentioned any criteria on selling of the asset. I think even if the spouse rents it out the income would be hers.
@Rakesh, I think this is wrong, where did you get this from Rakesh ? I think in this case the income will be clubbed,
@Radhey,
I got it from incometaxguide –
http://indiantaxguide.wordpress.com/category/clubbing-of-income/
Interesting article. There is also the concept of pin money which you should mention where the amount of money the homemaker saves from home expenses in budgetary household is homemaker’s own money and does not apply to clubbing laws.
Secondly a husband can give a loan to his wife and this loan if genuine (should be bank transfers from account A to account B) is also not clubbed.
The laws are stringent but loop holes exists. There are few smart brains there still to exploit the rules using the above two methods to make fortunes for their non-working spouses.
@D. Bahroos, Hey Dhiraj, welcome back man – whee have you been and how are you ?
You are right about the two points you mention. Thanks for brining this up.
@TheWealthWisher, Thanks buddy,I am good, thanks.Glad to know that you accept the two mentioned points.Hope all is fine at your end too.
@D. Bahroos, Thanks Dhiraj for sharing the concept of pin money. But how can someone track and prove the amount saved as pin money? People can show any ridiculous amount under it just to avoid taxable income.
@Vivek K,
Dear Vivek, your point is good.There is no law which quantifies the pin money. Pin money cannot be any ridiculous amount, if the household expense is Rs 10000 then the pin money can be like Rs 1000 or in that vicinity, not more.If your non-working spouse buys a property in 2 years of marriage only with pin money then this may be subject to questioning. Also one should not inflate the household budgetary to make a substantial pin money.
@D. Bahroos, Suppose someone says that their monthly household income is 70000 and save 20000 as pin money. Then start investing that 20k in stock market and make short term profits.
This way income need not be clubbed and tax can be saved? Also, in reality does anyone from IT dept. check on such things?
@D. Bahroos,
Good one. Liked the way you said that loop holes exists and there are smart brains out there to exploit it. Did not know the concept of pin money.
@rakesh, Thanks Rakesh, I am glad that you now are aware of the pin money concept. You could explore more of it b googling. Cheer\
Hi Radhey,
Nice article, I have explored few of these points sometime back (don’t remember where) though almost forgot about it. This was a good refresher. I am sure many people don’t know about this.
While this article talks about clubbing of income and tax on it. I have one question. Which product do you think is good/best to invest on spouse name and enjoy the tax benefit? It woule be great if you and the readers here give some suggestions. Actually, one of my friend asked me this last month. I first asked him to get term insurance (he doesn’t have any) and then think of investment on his wife’s name. I also told him to hire a financial planner instead of asking me, he didn’t care :(. I thought of getting some advice here instead of just deciding my self.
@Chirag,
I think Radhey has mentioned about loan between spouses. I will just summarize
If you want to buy a house in your wife’s name but don’t want the rent to be taxed as your income, you can loan her the money. In exchange, she can give you her jewellery. For example, if you transfer a house worth 10 lakh to your wife and she transfers her jewellery for the same amount in your favour, then the rental income from that house would not be taxable to you.
There is also no tax on gains from shares and equity mutual funds if held
for more than a year. So, if one invests in these options in the name of the spouse, there is no additional tax liability. I have used this approach to invest MF’s in my wife’s name.
Hope it helps.
@Rakesh,
Does it matter if I invest in MFs in my name or wife’s name? After one year it is tax free for both.
@Rakesh, Really helpful Rakesh :). One more question (giving you more work). If my friend invest in ELSS on his wife’s name, can he calim this investment under Sec 80C? I could have searched on this. Still, I also want to know from you guys here addition to my research.
@Chirag, While Rakesh finds out an answer to your question, why does your friend want to invest in his wife’s name and then claim tax exemption? Why not in his own name?
@Vivek K, LOL LOL I am really happy to see this question here. This is the first question I asked to my friend.
He couldn’t explain me and from his expression I understood and said ok no need to explain and we both laughed. Seems his wife is asking. I then said, if you want your wife’s future secure then first take a term plan and then nominate your wife wherever possible for your investment. He wanted to save tax while investing on his wife’s name. ‘If still she is feeling insecure, then give me some time, will let you know something logical out there’ was my last answer. I didn’t want to suggest ULIP kind.
@Chirag, hahahaha, poor guy!!
Ask him to open a joint account for emergency funds and wife would be happy as well. Also, your friend can nominate her for FDs, MFs, salary account and all other investments.
And yes insurance is of course necessary.
@Vivek K, Good suggestions, will explain him all.
@Chirag,
No he cannot claim tax exemption for ELSS investment in his wife’s name.
@Chirag, Quite an interesting question you have asked Chirag. You always bring a twist to any discussion :).
I can think of following scenarios: –
1) Ask you relatives to gift as much cash as possible for your marriage. All gifts at your marriage will be tax free, no upper limit 😉
2) Buy a joint property and if given on rent you can share the rent amount and enjoy 50% tax benefit. It has other benefits as well, which are at least applicable for this year.
3) Opening PPF account in your wife’s name can help you earn extra tax free interest.
4) Not sure if this would be allowed as per new budget: Open savings account in your wife’s name and earn 10k tax free interest.
@Vivek K, Thanks so much Vivek. Yours and Rakesh’s (and ofcourse always Radhey) contribution encouraging me to write/ask something more and it turns out to be a good discussion :).
I will make sure, my relatives gift me as much as possible in my marriage 🙂 🙂 🙂 :).
You and Rakesh both mentioned good point about buying a property, will keep in mind. Also inform the same to my friend, if he is planning to buy one :).
One more question here 😉 on PPF. While interest income is tax free, the amount invested in wife’s name (non-working) is also be exempted from tax and can be claimed or not.
I think, if you invest in PPF on your child’s name can be exempted from tax (let me know if am wrong), though not sure about wife.
@Chirag, I am also not sure about PPF exemption for non working wife. I think answer would be the same as ELSS investment.
As far as PPF in child’s name is concerned, the total contribution [self and child account] cannot exceed 1 lakh so yes exemption can be taken till 1 lakh.
@Chirag,
You can also claim tax benefits if you have an account in your wife’s name. I am doing the same.
@Rakesh, So Rakesh one can claim exemption for PPF but not for ELSS investment? Pretty strange, eh?
@Rakesh, Cool, thanks for the info. My friend will be happy :).
Hi,
If my wife opens PPF account and I deposited my money on that. Then earned interest will be taxable or not on my hand?. This question is particular for PPF case. Since income from PPF is tax-free.
Thanks and Regards
@KG, As far as my knowledge goes the interest earned is tax free even if the account is in your wife’s name and you are depositing the money.
Radhey, can you confirm please?
@KG,
Agree with Vivek, the interest earned is tax free.
@Rakesh, Yes it is.
It means PPF is great tool(with 8.6%) for saving and a husband+wife can invest upto 2 lakhs without bothering about tax.
@KG,
Yes, if both spouses are working you can claim tax exemption separately. By the way PPF rates will go up to 8.9% from 1st April.
Here is the article
http://timesofindia.indiatimes.com/business/india-business/Small-savings-set-to-fetch-higher-returns/articleshow/12347310.cms
@Rakesh, Correction, the revised interest rate for PPF is 8.8%.
http://zeenews.india.com/business/news/finance/ppf-interest-rates-go-up-from-8-6-to-8-8_44622.html
@KG, It is one of the best debt instruments at present offered by government. It is a must in every portfolio.
And the best part is no one including the Indian government can touch this money without your permission. In other cases government can freeze your accounts or sell your investments to recover any money but not PPF.
Soon NPS is going to be another popular instrument, watch for it.
To claim IT deductions, the best investment is Equity Linked Saving Schemes. Yes, they are equity linked and are risky but if you understand the market, nothing can be better. My opinion.
Here is a scenario,
Mr A and Mrs A are husband and wife. Both file Income Tax Return. Mr A sold a plot of land for Rs 100000 and transfers Rs 50000 to his wife’s account. He show it in his books as interest free loan 9to be on the safe side, interest on such “loan” is negligible, say 3%). Mrs A invests the money in a Fixed Deposit and earns Rs 5000 in a year.
Now this income of Rs 5000 will be the income of Mrs A and not Mr A. I know it involves a lot of paper work and calculations but it does distribute the income and consequently tax burden is reduced.
Comments please.
What’s your question here Praneet?
Not a question but a suggestion to distribute your income over many heads.
You are right Praneet, this is a good way of saving tax burden. Thanks for your suggestion.
Hi,
It relates to the PPF account contribution. I agree with the views you have it the wife is not working.
But if the Wife has her own income and If I contribute to her PPF account, will be getting the benefit or will she be getting the benefit for the amount I invested in her account?
Lets say I and my wife both are having Rs. 500000 income (each). I invested Rs. 70,000 in my PPF account and Rs. 30,000 in her PPF account. At the same time she also Invested Rs. 70000 in her PPF account. Then how would the tax calculation go?
1. I will be getting exemption of Rs. 100000 and she will be getting exemption of Rs. 70000
2. I will be getting exemption of Rs. 70000 and she will be getting exemption of Rs. 100000
or any third option
Will wait for the answer…….
I think the answer is no. 2 because in order to claim the tax benefit you have to provide the evidence [pass book] that money was deposited in a particular FY in the PPF account in your name.
I am a NRI. If I gift money to my spouse from my overseas account to her overseas account and she remits it to India and earns income on the same through MFs or buying/selling securities, does this get added to my investment incomes in India?
Not too sure about this, let me check. Is your wife working ?
I have two flats with co-ownership of my wife (50% in each). my question
1. I am owner of two flats or one flat
2 i have pay any health tax for my 2nd flat.
3. rent inocme will be divide in two or it will add in my inocme since i’m paying EMI for both flats.
1. 2 flats. If you want just one, I can take the other 🙂
2. health tax – what is that ?
3. divided between the two of you. But check with your tax consultant while filing IT returns.
Husband & wife both working in the same organisation but declaring that they are living in different houses whithin the same area and are paying rent separately for their rented house to claim HRA exemption. CAn we allow exemption to both employees?
I invest rs.100,000 in stock market in my wife name. But now there is loss about 60000. Is this loss can I clubbed with my income of rs. 280000.
Dear Sir,
Me & my wife both are working in IT sector at Pune and both are in 20 % bracket. We plan to buy two ready flats at Pune costing around 50 and 30 lakhs. These will be our first properties and will be financed by loan. These are located in adjacent areas. We will be occupying one of the flats. Please guide as to
• How we shall take the loan/own the properties, jointly or separately for both properties to minimize the tax liability.
• Will the principal and interest deduction available for both of us
• How will be tax treatment in case of unoccupied flat
• What will be the tax treatment if we live in our ancestral house at Bhosri, near Pune and rent out both properties
bkumar.2000@rediffmail.com