Clubbing of income: spouse, gifts, and a minor child

Clubbing means the other person's income is included in your total income. You pay tax on your own income and on that added income. A minor child's income is the example the FAQ opens with.

Two rules sit beside Section 99.

• ✓ Section 96. If you keep the asset and only hand over the income, the income is still yours. The FAQ's example: Mr Raj owns a bungalow and the rent is ₹84,000 a year. He transfers that rent to Mr Kumar and does not transfer the bungalow. The ₹84,000 is taxed in Mr Raj's hands.
• ✓ Section 97. If the transfer is revocable, you still control the asset or the income from it, the income is taxed as yours. This does not apply to a transfer by way of trust that cannot be revoked during the beneficiary's lifetime, or to a transfer that cannot be revoked during the transferee's lifetime.

If you have a substantial interest in a concern, salary, commission, fees, or other pay your spouse gets from that concern can be clubbed. Cash or kind. Direct or indirect.

It is not included when that pay is only for the spouse's own technical or professional knowledge, experience, or qualification.

Substantial interest, from the FAQ:

A relative here is the husband, wife, brother, or sister, or any lineal ascendant or descendant, maternal or paternal.

Section 99(5) puts this salary with the spouse whose total income is higher before the salary is added. Once it is included with one spouse for a tax year, later years stay with that spouse unless the Assessing Officer moves it, after hearing the other spouse.

Section 99(1)(a)(ii) adds the income from an asset you transfer to your spouse, directly or indirectly, otherwise than for adequate consideration. The FAQ's two cases:

• ✓ Mr Soham gifts 8,400 debentures to his wife. Interest on those debentures is included in his income.
• ✓ Mr Kapoor gifts ₹8,40,000. His wife buys debentures with it. Interest on those debentures is included in his income. Changing cash into debentures does not take it out.

The same clause does not apply in two cases the FAQ names. The transfer was for adequate consideration. Or it was in connection with an agreement to live apart.

The clubbing stops at the income from the transferred asset. Further income the spouse earns by investing that income is theirs. The FAQ's example: Mr A gifts ₹10,00,000. His wife puts it in a fixed deposit. Interest on that deposit is included in his income. If she reinvests that interest, the income on the reinvested interest is taxed as hers.

If the asset is put into a business, or in as capital of a firm, Section 99(2) does not add the whole profit. The amount included is the spouse's (or son's wife's) income from that business, times the transferred capital, divided by their total capital. Both capital figures are taken on the first day of the tax year.

A loss counts as income for this section. If the transferred asset produces a loss, that loss is included in the transferor's income in the same way. That is Section 99(5)(d), and FAQ question 12.

Section 99(1)(b) covers an asset transferred to your son's wife on or after 1 June 1973, otherwise than for adequate consideration. Income from that asset is included in your income. The FAQ says this still applies if she changes the form of the asset.

Section 99(1)(d) covers a transfer to any person, or to an association of persons, otherwise than for adequate consideration, where the income is for the immediate or deferred benefit of your spouse or your son's wife. Only that benefit is included. A transfer before 1 June 1973 is left out where the benefit is for your son's wife.

Section 99(1)(c) adds a minor child's income to a parent. It is not added in three cases:

• ✓ Income from work the child did
• ✓ Income from the child's skill, talent, specialised knowledge, or experience
• ✓ The child has a disability of the kind in Section 154

If the parents' marriage subsists, the income goes to the parent whose income is higher before this addition. If the marriage does not subsist, it goes to the parent who maintains the child that tax year. Once it is with one parent, later years stay there unless the Assessing Officer moves it, after hearing the other parent.

Where minor-child income is included, the parent can claim an exemption under Schedule III, table serial 17: ₹1,500, or the clubbed income, whichever is less.

Mrs Raja has no income in that example, so anything that is clubbed goes to Mr Raja.

Section 99(3) applies when a member moves their own property into the Hindu undivided family without adequate consideration. That includes treating it as joint family property, or throwing it into the common stock.

• ✓ Before a partition, income from that property is included in the transferor's income.
• ✓ After a partition, income the transferor's spouse gets from that property is still included in the transferor's income.

Section 99(4) leaves this out where the conversion was on or before 31 December 1969.