Sharing is caring. However, in the world of tax, sharing means shifting your tax burden on someone else, so as to reduce taxable income. Taxes increase as your income increases. Usually, taxpayers falling in the higher tax slabs, divert their income to a spouse, major children, or parents to avoid paying a high amount in tax.
This is tax evasion. To curb this practice, clubbing provisions were introduced in the Income Tax Act, 1961. Sections 60 to 64 of the IT Act, deal with clubbing of income.
Generally, an individual is taxed only on his/her income. But, clubbing provisions make you liable to pay taxes on some incomes which are ‘clubbed’ along with your own income. This is called clubbing of income. IT department seeks full disclosure and transparency in the case of clubbing of income.
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You may invest in the name of a non-earning/lesser earning spouse, major children or parents in Fixed Deposits, NSC, mutual funds, and so on. Any income that they earn on such investments is not considered as their income, but yours. You may have invested with an intention to save and provide for their financial needs, but the IT Act considers it as diversion of income. So, you are taxed on any income earned on these investments.
The intention to club income is to make sure there is no tax evasion when you move assets or income within the family. Be it an income or a loss (if allowed to be adjusted against an income), it cannot be transferred to anyone else and hence, will be 'clubbed' with your income.
Confused? We’ll make it really simple. Let’s say your spouse invests the interest earned on FDs in mutual funds. Any income arising from the mutual funds will be considered as your spouse’s income. Therefore, your spouse and not you are taxed.
Transfer of asset to a spouse in an agreement to live apart doesn’t attract clubbing provisions.
It is a common tendency to invest in minor children’s names to avoid paying taxes.
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