What are Income Clubbing Provisions and Tax Implications

I have invested some money in Fixed Deposit in name of my wife’s name , She is not earning any thing right now , Will she have to pay tax on this ? . This is a innocent questions because of inadequate knowledge of Tax Provisions on Clubbing of Income . Let us see some Must know tax rules in area of Clubbing of Income .

Top rules of Clubbing of Income

• Income of a minor child is added to husband or Wife’s Income , depending on whose total income is greater. So if Child earning is 1 Lacs and Wife is earning 5 lacs and Husband is earning 4 lacs , Child income will be added to Wife Income and it will be 6 lacs of income for Wife and taxed accordingly . Do you think you can live with 90% of your Salary ?

• If you invest money in your Minor Child or Spouse name , All the income happening from that investment will be clubbed into your income . the main thing is who ever is the original owner of money will be taxed .

Exception : Income of a minor child shall not be clubbed and is taxable if the child is suffering from a disability (under Section 80U) such as physical disability, complete blindness or if he earns the income through manual work or any activity involving application of his skills or talent or if both his parents are not alive.

• The compounded income is not subject to clubbing . Which means that the income arising from the income which is clubbed is not clubbed . So If Ajay invests 30 Lacs in an FD on his Wife Name , Suppose the Interest on this FD comes to be 2.4 Lacs and The interest arised from this FD will be included in Ajay income , but any income which comes from this interest of 2.4 lacs will be considered as his Wife income and not Ajay income and hence will not be clubbed back to Ajay’s income . So if his Wife uses this 2.4 lacs and makes an income of 1 lacs . This 1 Lac will not be considered and clubbed in Ajay’s. Do you know How to find the Best Fixed deposit ?

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Some Tips Use can use to save Tax

#1 : For High Net Worth Individuals

If you are a High Net worth Individual and your Spouse does not Work , you can make investment on his/her name , So that the income which comes from the income arised from that investment is alteast not taxed .

Example : If Robert invests 50 Lacs in Stocks and Earns 20 Lacs , It will be considered as His income and Taxed and now if he invests this 20 Lacs in FD , all the Interest he gets is also taxed . But If he Invests this 50 lacs on his Wife name , the 20 Lacs income generated will be taxed as his income , but then when that 20 lacs is invested in FD , all the interest coming from that will be treated as Wife income and If Wife is not doing anything , Her Total income will just be this interest , around 1.6 Lacs considering 8% interest and hence It will not be taxable at all as its below the limits .

#2 Invest on your would-be-Wife or Son’s-Would-be-Wife name

Tax Clubbing rules does not apply when You invest money on some one’s name before Marriage (only yours would-be and Son-would-be , not your-friends-would-be) . So Any income arised from that investment will not be clubbed with your Income .

Example : If Manish is going to be married (thanks you guys) and He wants to invest 20 Lacs in an FD . He can do a simple tax trick , He can invest this money on his would-be-wife name. Now by doing so , all the interest coming from this FD will be considered as his wife Income and if her total income comes under minimum limit , She will not pay any tax on this . Where as If he invest this 20 Lacs on his own name or in his wife name after marriage , The interest will be taxed .

#3 Make sure the Investment on your Child Matures after their 18th Birthday

Clubbing Rules applies only for Minor Child’s , Its not applicable for Children above 18th . So make sure your Investments on Child Name mature after they are 18th , so that any income which arise from it is not your income . Read why you should open a PPF account even if you dont need it .

Example : So if you have a child aged 12 and you are planning to buy a Bond for 5 yr on this name , It will mature when child is 17 and hence will be taxed in your hand , better extend the Tenure by 1 yr and make it to 6 yr or 6.5 yr, so that The income arised from it is Child income and not taxed in your Hands .

#4 Give a Loan to your Spouse or Child , not a Gift

Clubbing Rules does not apply for genuine Loans Given to your Spouse or Child . So instead of just Gifting some money or Doing investment on their name , give Loan to them which they can use to invest them self , All the income from those investments will not be clubbed in your income. Make sure that you have a documentary proof of Loan , A simple letter of Loan with Signatures of both the party will be enough as Documentary Proof , no need to run for Lawyers for these .

#5 Create a HUF for Family investments and Family Properties

If you have a Joint or Big enough Family , Its better to Create a HUF , so that then all the investment which are for whole family and all the assets which belong to whole Family are on HUF name , in that case HUF will enjoy all the Deductions and exemptions just like an Individual . I don’t have much idea about HUF more than this .. so please control yourself before shooting detailed questions on HUF .

Conclusion

Knowing Clubbing of Income rules can help you in saving your Tax in different ways and Without the knowledge you may also loose many times . So better use these Tax rules to make best use of your situation .

Note : There are many exceptions and details in Clubbing Rules which are not covered here , These are just high level rules and not detailed rules . So please handle with Care . For more Tax related Articles , Visit Taxguru.in

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