Clubbing of Income for Taxation

An assessee is typically taxed on his/her own income. In certain cases an assessee may have to pay a tax on income that is legally earned by someone else, generally a family member or a dependant. Initially, taxpayers took undue advantage of this provision by transferring their assets to a family member with a lower income, helping to reduce the overall tax liability. The clause for clubbing of income was added in the Income Tax Act, 1961, in sections 60 to 64, to avoid such practices of tax evasion or avoidance.

Clubbing of Income with Spouse

When an assessee’s receives remuneration from a concern in which his/her spouse has substantial interest, their incomes are clubbed and the tax liability is computed on the aggregate income.

Under section 64 (1) (ii):

• A concern may be a business (sole proprietorship, partnership or company) or a professional concern.
• Substantial interest implies when the spouse is entitled to more than 20% of the firm’s profits or holds equity shares in the company worth at least 20 percent of the voting power.

Clubbing Income of Minor Child

Under section 64 (1A), income earned by a minor child is clubbed in the income of that parent whose income is greater. However, if the minor’s parents are separated, his/her income is clubbed with the income of the parent who maintained the minor during the relevant previous year.

Note that section 64(1A) is not applicable when the income of minor is earned from the following sources:

• On account of manual work.
• On account of an activity that involves application of talent, skill or specialized knowledge.

Clubbing income always helps to reduce the overall tax liability.