The rule says one should pay taxes on the income earned. What taxpayers seldom know is that income may be expanded to include others income as well, under certain circumstances.
A few decades ago, taxpayers used to transfer assets or income to close relatives. By doing so, they were able to avoid higher tax brackets and, hence, reduce their tax outgo. To discourage such practices, provisions were incorporated in the Income Tax Act to include income arising to a person (the legal, but not the real, owner of such income) in the income of another (the real owner) while computing the tax liability of the latter.
Any income arising directly or indirectly to the spouse of an individual from assets transferred to the spouse will be clubbed with the income of the individual. However, there will be no clubbing if the asset is transferred to the spouse for adequate consideration or under an agreement to live apart. Also, any remuneration arising to the spouse of an individual from a concern in which such individual has substantial interest shall also attract clubbing. However, where income is solely attributable to the application of his or her technical or professional knowledge and experience, clubbing provisions shall not apply.
Clubbing provisions do not apply if a loan is granted to the spouse. Suppose X gives a loan of R20 lakh to Y. With this loan, Y purchases a house and earns rental income. Here, clubbing will not apply since the loan is not the transfer of an asset.
Taxmen have plugged the loophole by extending clubbing provisions to the sons wife also. It is provided that any income arising directly or indirectly to sons wife, as a result of transfer of asset otherwise than for adequate consideration, shall be the income of transferor. It is pertinent to note that, the relationship of husband-wife, father-in-law/mother-in-law and daughter-in-law should subsist both at the time of transfer of asset and at the time of accrual of income. Therefore, if assets are transferred before marriage to the would-be daughter-in-law for inadequate consideration, there shall be no clubbing even after marriage.
Now, lets take a look at the income of a minor child. All income arising to a minor child (not suffering from any specified disability) shall also be clubbed in the income of the parent (whose total income is greater) except when income is earned by the minor child on account of any