The concept of 'clubbing of income' is a provision under the Income Tax Act, 1961, aimed at preventing tax avoidance by transferring income among family members. This provision ensures that income from various investments, such as property, fixed deposits, shares, mutual funds, and post office savings, is included in the taxpayer's income if transferred to family members, thereby ensuring the taxpayer bears the appropriate tax liability.
Sections 60-64 of the Income Tax Act, 1961, outline regulations regarding the consolidation of income. This practice aims to prevent taxpayers from evading their tax responsibilities by transferring assets or incomes within their family. Clubbing of income encompasses all types of investments such as property, fixed deposits, shares, mutual funds, and post office savings.
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Under Section 64 of the Income-Tax Act, 2025, if an individual holds a substantial interest in a business, any income paid to their spouse in the form of salary, commission, or fees is included in the taxpayer's total income. This means that income earned by a spouse from a mutual concern is treated as the taxpayer's income unless the spouse's contribution is justified through technical or professional qualifications. This is part of broader measures to prevent income shifting for tax benefits.
A notable aspect of clubbing is that it extends to the income of minor children, which is added to that of the parent primarily responsible for the child's upbringing. This rule applies irrespective of the source of income, ensuring that attempts to reduce tax liabilities by attributing income to minor children are thwarted. Similarly, investments made in a spouse's name are also clubbed with the taxpayer's income, unless the spouse's income is the result of their technical expertise and qualifications.
The Income-Tax Bill 2025 proposes significant changes to the clubbing provision. "The Income-Tax Bill 2025 proposes to remove the first condition and include the term 'qualification' in the second condition alongside knowledge and experience. Thus, income could be attributable to the application of technical or professional knowledge, experience, and qualifications.
However, the Income-Tax Bill does not explicitly say that the spouse must possess such qualifications. "It will cover cases where a spouse applies technical or professional knowledge and experience without formal qualifications," according to Taxmann’s Advisory & Research. This modification could broaden the scope for income inclusion based on practical experience rather than formal educational credentials.
The current system exempts spouses with technical qualifications from having their income clubbed if it derives from their expertise. The suggested changes in the Income-Tax Bill aim to simplify this by focusing more on the practical application of technical or professional knowledge, potentially recognising informal or experiential learning. This alteration may impact how families plan their investments and manage their tax liabilities.
These proposed amendments to the Income Tax Act reflect a shift towards accommodating various forms of expertise, recognising that formal qualifications are not the sole indicator of capability. By potentially allowing for broader inclusion criteria for clubbing, the Income-Tax Bill 2025 seeks to adapt to modern working and learning environments, although the precise implications will depend on the final interpretation and implementation of the new rules.