Jagoinvestor

September 23, 2009

What are Income Clubbing Provisions and Tax Implications?

I have invested some money in Fixed Deposit in the name of my wife as she is not earning any income. Will she have to pay tax on this?

This is an innocent questions because of inadequate knowledge of Tax Provisions on Clubbing of Income and how it attracts tax liabilities. Let us see some Must know tax rules for Clubbing of Income.

Income Clubbing Provisions and Tax Implications

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 earns Rs. 1 Lacs and Wife is earning 5 lacs and Husband is earning 4 lacs, then the income of Child will be added to Wife’s Income and it will be 6 lacs of income for Wife and it will be taxed accordingly. Do you think you can live with 90% of your Salary?
  • If you invest money in your Minor Child’s or Spouse’s name then all the income earned from that investment will be clubbed into your own income. The main thing to note here is whoever is the original owner of money will be taxed on the income.

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 in his Wife’s Name, suppose the Interest on this FD comes earns Rs. 2.4 Lacs and the interest from this FD will be included in Ajay’s income, but any income which comes from this interest of 2.4 lacs will be considered as his Wife’s income and not Ajay’s income and hence will not be clubbed back to Ajay’s income. So if his Wife uses this Rs. 2.4 lacs and makes an income of 1 lacs from it, then this 1 Lac will not be considered in Ajay’s income. Do you know How to find the Best Fixed deposit?

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 the investment on his/her name. So that the income which comes from the income arisen from that investment is at least 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 do not apply when you invest money on some one’s name before Marriage (only your would-be and Son-would-be, not your-friends-would-be). So Any income earned from that investment will not be clubbed within 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, It’s 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 don’t 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.

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139 Comments
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Nil Dave
Nil Dave
4 months ago

My wife earns from her sewing work at home, does that income should be clubbed with my income or not?

Pangajavalli
Pangajavalli
2 years ago

Hi Manish,

My son transfer 25 lakh in my account and after some time i have transfer amount to his account again. in between that interest came via savings account is accountable with me..right?

Hitesh
Hitesh
7 years ago

Hello

If i gift 500000 rs to father wil my income wil be taxable

Rakesh
Rakesh
7 years ago

I had gifted my wife 2 lakh Rupees and she had 3 lakhs of her own.She invested all 5 lakhs in shares in year 2013 and lost 1 lakh Rupees. However since she was not earning any income she didn’t file IT return. Now she has got IT notice with STT code for AY 2014-15. What will be the tax treatment for net loss from shares.

moral
moral
7 years ago

I received immovable residential property worth 50 Lakh from spouse of my elder brother. Please clarify above in following conditions :-
(a) On receipt of above property would any tax liability on me instantly ?
(b) Second condition is that I would like to sale out above property after 7 year and further invest in residential immovable property, Would then be any tax liability on me. ?

AJ
AJ
7 years ago

My Father plans to gift me Rs. 1 lakh. I’m employed and earn ~Rs. 4 lakh. I wish to invest the money in stocks. Who will have to pay the tax, and what amount would needed to be paid?

Anil
Anil
8 years ago

Hello,

I invested 1L in stocks against my wife’s name who is not working. There was a net loss of 5K for the FY

My question is – Should my wife be filing return to carry forward the STCG loss or should I be using this in my tax return as carry forward loss ?

Thanks
Anil

MCSekar
MCSekar
8 years ago

Manish your explanations and answers are simple to understand and superb, congrats.

sandeep
sandeep
8 years ago

sir i am in 30 percent tax bracket. my father is also tax payee.my father wants to give me a huge amount as gift .what will be my tax liabilities.

Rohan
Rohan
8 years ago

Hello Manish

I’m salaried & fall under 30% tax slab. 1) I transfer Rs 5 lacs on my mother’s name who is a housewife & has no source of income, in a bank account with me as the second holder & she as the primary holder. Then she makes a FD out of it where she is the primary holder & me as the secondary holder. She also fills the form 15 saying she has no other income apart from the interest on FD. Her yearly FD interest would be max Rs 45,000. Whose tax liability is this interest amount? 2) I transfer Rs 5 lacs to my younger sister who is a student & has no source of income, in a bank account where she is the primary account holder & my father is the secondary holder (father also retired & no separate income except FD interest). Then she makes a FD out of it where she is the primary holder & father as the secondary holder. She also fills the form 15 saying she has no other income apart from the interest on FD. Her yearly FD interest would be max Rs 45,000. Whose tax liability is this interest amount?

Jatanta
Jatanta
8 years ago

Hello if I gift as a cheque rs. 100000 to my sister every year. And if she can fixed it and gain interest. Then who pay the tax on interest

Lohit
Lohit
8 years ago

If I gift my wife 2 lakhs and she deposits in an FD and earns an interest of 16,000/-, can she declare that as her income and pay tax on it instead of me?

Deepak
Deepak
Reply to  Jagoinvestor
8 years ago

But as per above Income tax rules we can make a paper that i have given loan to my wife and she is investing it further into FD and earning interest then i think i will not have any TAX liability on interest gained.

Deepak
Deepak
Reply to  Deepak
8 years ago

Another option we can deposit money on name of our father or mother. Then this money will be not be taxable to us. Am i right in above 2 logics ????? Manish

Vignesh
Vignesh
8 years ago

Say, I’m gifting Rs3 Lakh to my mother and she gifting the money Rs2 Lakh or entire Rs 3 Lakh to my Wife. And my wife invests in FD and earns Rs 30,000 in a year. Whether this Rs 30,000 will be taxed under my name or will not be taxed as it came from the her mother-in-law?

asdfg
asdfg
8 years ago

My Husband & Sons Work in Merchant Navy (Tax Exempt Income), so if they gave me some money , does interest earned on FD will be mine or Clubbed, also my son gave me some money 2-3 yrs back , which i gave to my husband directly to pay loan amt. as he did not have job that time due to Heart problem, now my husband has given back that money to me , if interest is clubbed, how can i avail that money as it was given by my son to my husband loan A/c directly.

asdfg
asdfg
Reply to  Jagoinvestor
8 years ago

Thanks, but then majority of that money (FD) belongs to my son, which he gave directly to my Husband Loan A/c ,2-3 years back , & since he can avail a certain portion of interest as per his bracket (2.5 L), since his entire earnings is from NRE a/c , how can i differentiate , is there any means , by which i can proof that this money belongs to my son which he gave my husband , & now he is giving me back, does Loan A/c shows from which A/c money is recv., & can i avail or he avail if we have this in writing.

KANKS
KANKS
8 years ago

I fixed some money in my wife’s name. Bank deducted TDS on it. Now how do I claim the credit for such TDS deducted in my wife’s name? All her income is clubbed in my hands thereby she literally has no taxable income in her name. What is the solution as i cannot claim her TDS in my I.T return!

KANKS
KANKS
Reply to  Jagoinvestor
8 years ago

Thanx a lot for your advice.

veejaish
veejaish
8 years ago

Hi Manish,

My mother (a home maker , no source of income) transfer 25 lacs to me. I use this money to buy a property worth 35 lacs . I take loan for the extra 10 lacs. Will i still be taxed?

Anupam
Anupam
8 years ago

Hello Manish,

I have gifted 10 Lakhs to my wife (not working). She invested it in Equity Shares. There was Net Capital Gains of 2 Lakhs. I clubbed the Net Capital gains with my owm income and paid Tax. Now, She re-invested the whole amount of 12 Lakhs again in 10 % FD and earned 1.2 Lakhs. I understand that the income from 2 Lakhs part will no longer br clubbed with my income. BUT, what about the income from the 10 Lakhs amount which was re-invested ? Is the interest from this portion to be again clubbed with my income ? Does this happen for all subsequent years forever ??

Regards,
Anupam

Biswajit
Biswajit
8 years ago

Hi Manish,
I have invested 10 lacks in my wife’s name last yr and received around one lakh interest on it. This is reflected in her 26AS and some TDS also deducted.
She has other incomes also.She used to work before and has FDs on her name . All other FDs are her own money which she earned before. Can I declare the interest income which I deposited in her account without clubbing or declaring her PAN ?
Biswajit

Ravi G
Ravi G
9 years ago

Hi Manish,

I am in working (salaried) and paying taxes. I had applied for a plot under govt. scheme and paid the amount from my account for this.

However, I did not get the plot and for refund purpose I took the refund amount back in another bank account which is a joint bank account of me with my wife. My wife is not working and has no income.

I want to know will there be any tax issue in this while filing the income tax for my wife. Does she need to pay any tax on this?

On this money I had already paid the taxes.

Thanks in advance for your reply!!

Regards,
Ravi G

rengarajan
rengarajan
9 years ago

hi, my wife and I have a fixed deposit with my name as the first. I had TDS deducted for an interest of around 10000 (1000 deducted as TDS). Can I claim refunds if my wife also works and files a separate return (as long as the interest earned on the fixed deposits is less than 10000 for each)? Thanks