Meaning of Clubbing of Income
"Clubbing of Income" refers to the inclusion of income of one person in the income of another person, for the purpose of calculating the tax liability. The provisions of clubbing of income have been incorporated in the Income Tax Act, 1961 to prevent taxpayers from avoiding taxes by transferring their income to another person who is subject to a lower tax rate.
Here are ten situations where clubbing of income provisions may apply under the Income Tax Act, 1961:
- Income of a minor child: Any income earned by a minor child is clubbed with the income of the parent whose total income is higher.
- Transfer of assets to spouse: Any income arising from an asset transferred directly or indirectly by an individual to their spouse is clubbed with the income of the individual.
- Income from assets transferred to son's wife: Any income arising from an asset transferred directly or indirectly by an individual to their son's wife is clubbed with the income of the individual.
- Income from assets transferred to other person: Any income arising from an asset transferred directly or indirectly by an individual to any other person, for the benefit of the individual or their spouse, is clubbed with the income of the individual.
- Income from firm or association of persons (AOP): Any income received by an individual from a firm or AOP in which they are a partner or member is clubbed with the income of the individual.
- Income from property transferred to son's wife or son's minor child: Any income arising from an asset transferred directly or indirectly by an individual to their son's wife or son's minor child is clubbed with the income of the individual.
- Income from an asset transferred to a revocable trust: Any income arising from an asset transferred directly or indirectly by an individual to a revocable trust is clubbed with the income of the individual.
- Income from an asset transferred to a non-revocable trust: Any income arising from an asset transferred directly or indirectly by an individual to a non-revocable trust is clubbed with the income of the trust.
- Income from self-acquired property transferred to another person: Any income arising from an asset transferred directly or indirectly by an individual from their self-acquired property to any other person is clubbed with the income of the individual.
- Income from partnership firm transferred to another person: Any income received by an individual from a partnership firm in which they are not a partner but have a substantial interest is clubbed with the income of the individual.
Summary
| Situation | Explanation |
|---|---|
| Income of a minor child | Any income earned by a minor child is clubbed with the income of the parent whose total income is higher. |
| Transfer of assets to spouse | Any income arising from an asset transferred directly or indirectly by an individual to their spouse is clubbed with the income of the individual. |
| Income from assets transferred to son's wife | Any income arising from an asset transferred directly or indirectly by an individual to their son's wife is clubbed with the income of the individual. |
| Income from assets transferred to other person | Any income arising from an asset transferred directly or indirectly by an individual to any other person, for the benefit of the individual or their spouse, is clubbed with the income of the individual. |
| Income from firm or association of persons (AOP) | Any income received by an individual from a firm or AOP in which they are a partner or member is clubbed with the income of the individual. |
| Income from property transferred to son's wife or son's minor child | Any income arising from an asset transferred directly or indirectly by an individual to their son's wife or son's minor child is clubbed with the income of the individual. |
| Income from an asset transferred to a revocable trust | Any income arising from an asset transferred directly or indirectly by an individual to a revocable trust is clubbed with the income of the individual. |
| Income from an asset transferred to a non-revocable trust | Any income arising from an asset transferred directly or indirectly by an individual to a non-revocable trust is clubbed with the income of the trust. |
| Income from self-acquired property transferred to another person | Any income arising from an asset transferred directly or indirectly by an individual from their self-acquired property to any other person is clubbed with the income of the individual. |
| Income from partnership firm transferred to another person | Any income received by an individual from a partnership firm in which they are not a partner but have a substantial interest is clubbed with the income of the individual. |
Conclusion
In conclusion, clubbing of income provisions under the Income Tax Act, 1961 is designed to prevent taxpayers from avoiding taxes by transferring their income to another person who is subject to a lower tax rate. There are various situations where these provisions may apply, including income of a minor child, transfer of assets to spouse, income from assets transferred to other person, income from firm or association of persons (AOP), and income from property or assets transferred to revocable or non-revocable trusts. Taxpayers should be aware of these situations and take necessary precautions to avoid unintended tax liabilities. Consulting with a tax professional is always advisable for specific advice related to individual circumstances.
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