Tax Saving Tips in India: Clubbing of Income of Spouse and Child

You might have seen in your childhood that your parents might have made investments in your name. The basic idea behind this was to save tax. Similarly, even today most of us invest our money in the name of our spouse or child hoping that we will get tax benefit. Well, let me clear one thing, that it is not a profitable investment option. Even though the income generated is in the name of your spouse or child, but still you have to pay tax from your pocket. But there are certain provisions under Income Tax where clubbing of income is not applicable. Now I will explain clubbing of income provisions for spouse and child separately.

Clubbing of Income of Spouse

So let us now understand what are the provisions of clubbing of income when you will clubbing with your spouse. Basically there are two Income tax section under which the provisions have been explained. Let us read and understand those provisions.

  1. Under Income Tax Section 64(1) (IV), certain conditions that need to be satisfied.
  • Taxpayer is an individual.
  • Asset must be transferred to his/her spouse.
  • Transfer can be done directly or indirectly.
  • Asset has been transferred other than the house.
  • The transfer of asset must not be in connection with an agreement related to divorce settlement.

2. Under Income Tax Section 27, it deals with ownership of the house property.

Rule 1: When you will transfer an asset in the name of your spouse without any consideration (directly or indirectly). Now in such a case the income generated from such assets can actually be clubbed in your income.

Let me explain you with an example, Amit transfers Rs 1,00,000 to his Seema (wife’s account). Now in exchange of this deposit Seema invests Rs 1,00,000 in fixed deposit. Lets say that after 1 years the money earned via interest is Rs 8000. As we know that FD and TDS are in the name of Seema. But still the income generated by FD is not the income of Seema since it is the income of Amit.

Now let me explain the theory of clubbing of income with the usage of word consideration, giving an example: Let us assume that Amit transferred assets of worth Rs 1,00,000 in the name of Seema. Seema bought that asset for about Rs 25,000 from Amit. Now Seema is the owner of the part of the asset worth Rs 25,000. Whatever, income will be generated by Rs 25,000 will be the income of the Seema. While the income generated by Rs 75,000 is the income of Amit. Hence that income amount will be clubbed with the spouse.

Rule 2: 
Using the above example to explain second rule:

As I said that Amit transferred Rs 1,00,000 in Seema’s account. Earnings made by that fixed deposit is the earning of Amit. As we know that the income received from your investment was Rs 8000. Now if Seema invested Rs 8,000 in some other fixed deposit and after one year she earned Rs 640 on her investment. Now the income generated from this investment is the earning of Seema not Amit.

Rule 3:

Now provisions for clubbing of income generated from house property are explained under Income Tax Section 27.

Assuming that Amit has transferred his house to his wife Seema without adequate consideration. Now in such a case, even though the property is legally in the name of Seema. But still Amit will possess the deemed ownership of the house. If in case after 1 year Seema sells the property now the income generated from the sale of the house will be the income of Amit.

There might be a case when the property is transferred to spouse but with an agreement of living apart. Suppose, Amit transferred Rs 50 lakh in the Seema account instead of transferring the property. In exchange to this Seema purchased a property. For such a case the ownership of the house will remain with Seema. Now either Seema sell the property or generates rental income it will be the income of Amit.

So these are the certain provisions that you should keep in mind if you are looking for tax saving tips.

Clubbing of Income of Child

Now whether your child is a minor or not there are different rules designed for children’s of different age group. Here let us understand section separately for minor child and major child.

Clubbing of Income of Minor Child (less than 18 years old)

If you think that one of the tax saving tips is to invest your money in the name of your minor child. Then let me tell you that the income generated by the minor will be added in the income of one a parent whose income will be higher. So doing this would be just a waste of time and efforts as you won’t receive any tax benefits from clubbing of income of minor child.

Let us understand this with an example: Suppose Amit opened an FD account of Rs 1,00,000 in the name of his minor child. Now when FD of minor child will generate income annually then it is will added in the income of Amit.

However, clubbing provision is not applicable in the cases given below.

  1. If you minor child is suffering from any disability which has been specified under Sec. 80U and the income generated by the minor will not be clubbed.
  2. If the minor has generated income because of his manual work.
  3. If the income of a minor child is generated from the skills, talent, knowledge and experience that he/she possess.

In case if you are wiling to include the income of minor child in your income, then you will be provided with an exemption of Rs 1500. If the parents of a minor child are not alive then the income generated by minor will not be clubbed with income of guardians.

Clubbing of Income of Major Child (equal or more than 18 years)

Clubbing of income of major child will not be applicable no matter whether he is earning or not. Let me example this with an example, if Amit transferred Rs 1,00,000 in his major child account. Then his child invested it in FD and earned interest of Rs 8,000. Now this income earned is the income of the major child.

Clubbing of Income of Spouse and Child – Tips To Save Tax

Now that you have understood the basics and provisions regarding the clubbing of income. So now let me share with you tips to save tax by clubbing of income of spouse and child.

1. Gifts given to wife or daughter-in-law or son before marriage:

In case if you will transfer money to your wife account or in your daughter-in-law account then obviously the income will be clubbed. But there is an addition to this clause, if you will transfer the money in the name of your wife or daughter-in-law then clubbing of income provision will not apply here.

You can even gift them this money during their marriage or during your marriage in order to avoid clubbing of income. As you know that the gift received during marriage will help you in saving income tax.

2. Give Loan than Gift:

You should offer loans to your spouse or child instead of giving them gifts. If you will give gifts in the form of money to your wife or child then the income earned from it will be clubbed in your income. But when you will give loan to your wife or child on certain interest rate then the income generated will be the income of your wife and will not be clubbed in your income. But remember the only catch here is that your wife or child must pay the laon along with the interest. Also get all the documentation and paper work done with all the loan documents signed by both the parties.

3. Investing Money in the Name of Your Non-Working Wife:

Let us assume that you have invested Rs 1,00,000 in FD which will offer you 8% return per annum. So after one year you will earn interest of Rs 8,000. Even if FD is in name of your wife than also the interest earned will be your income not your wife’s income.

Now of you will invest those Rs 8,000 again in FD then the income generated will the income of your wife. Since she is a non working women then obviously her tax liability will be zero.

4. Gifts given to your Major Child:

As I have clearly stated above that the gifts given to your major child will not involve clubbing of income provision. So the entire income earned from that gift will be the income of your major child.

5. Gifts in the name of HUF:

The provision of clubbing of income will apply when the gifts are given to your HUF. However, clubbing provision does not apply when someone gifts are given to HUF. So next time if someone gift you something then ask them to gift to HUF.

6. Investing in products like PPF:

If you will invest in PPF, in the name of your spouse or minor child. Then obviously at the maturity of PPF it will be completely tax free.