Clubbing of the income of a spouse and a minor child (as set, 1961 Act, AY 2017-18)

Why income is clubbed

An individual could lower his tax by moving income to a spouse or child with little or no other income. Section 64 stops this by including some income of the spouse and of a minor child in the individual's own total income.

Income of the spouse

1. Remuneration from a concern in which the individual has a substantial interest (section 64(1)(ii)). Salary, commission, fees or any other remuneration that the spouse gets from such a concern is clubbed.
   • Substantial interest: for a company, shares carrying at least 20% of its voting power are owned beneficially by the individual, alone or partly with relatives, at any time in the year; shares entitled to a fixed rate of dividend (with or without a further right to share in profits) are not counted. For any other concern, the individual, alone or with relatives, is entitled to at least 20% of its profits at any time in the year (Explanation 2 to section 64(1)).
   • Exception: no clubbing where the spouse has technical or professional qualifications and the income comes solely from applying that knowledge and experience (proviso to section 64(1)(ii)).
   • Whose income: the remuneration is included in the income of whichever spouse has the greater total income, leaving that remuneration out (Explanation 1 to section 64(1)); so where both spouses have such an interest and both are paid, both remunerations go to that spouse. Once included with one spouse, such income of later years is not included with the other unless the Assessing Officer, after giving that spouse an opportunity of being heard, is satisfied that this is necessary (same Explanation).
2. Income from assets transferred to the spouse (section 64(1)(iv), which is subject to section 27(i): a transferor of house property on these terms is deemed its owner, so its income is his own under the head house property). Income from an asset transferred by the individual, directly or indirectly, to the spouse without adequate consideration is clubbed, unless the transfer was in connection with an agreement to live apart. Where the spouse invests the transferred asset (Explanation 3 to section 64(1)):
   • in a business, other than as a partner's capital or for admission to the benefits of partnership in a firm: only the part of the business income in the proportion that the asset's value on the first day of the previous year bears to the spouse's total investment in the business on that day is clubbed;
   • as capital contributed as a partner in a firm: only the part of the interest receivable from the firm in the proportion that the investment's value on the first day of the previous year bears to the spouse's total capital contribution in the firm on that day is clubbed.
3. Indirect transfers: income from an asset transferred to any person or association of persons without adequate consideration, to the extent it benefits the spouse, now or later (section 64(1)(vii)).

Income of a minor child

All income arising or accruing to a minor child is clubbed with the parent's income (section 64(1A)), except:

• income from manual work done by the child;
• income from an activity involving the child's skill, talent or specialised knowledge and experience; and
• all income of a minor child suffering from a disability of the kind specified in section 80U.

For a child without such a disability, the exception covers only the income earned by the child's own work or skill; income from investing such earnings is clubbed. A disabled child's income, investment income included, is not clubbed at all.

House property is treated differently. An individual who transfers house property without adequate consideration to a minor child, other than a married daughter, is deemed its owner (section 27(i)), so its income is taxed as his own under the head house property rather than clubbed as the child's.

Which parent's income

• Where the parents' marriage subsists: the parent whose total income, before this inclusion, is greater.
• Where it does not subsist: the parent who maintains the minor child in the year.
• Once clubbed with one parent, later years' income is not included in the other parent's income unless the Assessing Officer, after giving that other parent an opportunity of being heard, is satisfied that it is necessary to do so (Explanation to section 64(1A)).

Exemption of up to ₹1,500 a child

The parent with whom the child's income is clubbed may exempt up to ₹1,500 of it for each minor child (section 10(32)).

Examples

1. Mr. Rao holds 30% of the equity shares of Rao Plastics Ltd., which pays his wife, a commerce graduate with no technical or professional qualification, a salary of ₹3,60,000. Mr. Rao's own total income is ₹9,00,000; his wife has no other income. The salary is clubbed in Mr. Rao's income (substantial interest; his income, leaving out the salary, is the greater). Had her other income, leaving out the salary, been the greater, it would stay in hers; and if she were a chartered accountant working as the company's accounts head, it would not be clubbed at all.
2. Ten-year-old Tanya earns ₹40,000 from interest on a deposit gifted by her grandfather and ₹25,000 as a prize in a singing contest. The prize comes from her talent and is not clubbed. The interest is clubbed with the parent whose income is greater: ₹40,000 − ₹1,500 = ₹38,500 is added.