Smart things to know: Clubbing of income for taxation

The income tax rules define certain situations, wherein one is liable to pay tax on income earned by others. This is called clubbing of income, and helps eliminate tax avoidance by transferring income to those with lower tax incidence.

The income earned from an investment made in the name of a minor child is taxed as income of parents. It is added to either parent’s income, depending on whose income is more.

If the income earned from an asset, say, the interest earned on a bank deposit, is transferred without shifting the ownership of the asset, the income will be taxable in the hands of the transferer.

If the transfer of an asset is revocable, that is, if the transferer retains the right to re-transfer the asset to someone else, the income earned on the asset will continue to be taxed in the hands of the transferer.

Depending on the source, the clubbed income will be taxed under the applicable head of income, such as salary, house property, profit and gain from business or profession, capital gains and other sources.

Content Courtesy: Centre for Investment Education and Learning (CIEL). Contributions by Sunita Abraham, Girija Gadre and Arti Bhargava