Definition
Clubbing of Income
Clubbing rules add certain income of your spouse or minor child to your own income to prevent tax avoidance through family transfers.
Clubbing of income stops taxpayers from shifting income to lower-taxed family members. If you transfer an asset to your spouse without adequate consideration, the income it generates is taxed in your hands. Similarly, most income of a minor child is clubbed with the higher-earning parent, subject to a small exemption per child.
Income from assets gifted to a daughter-in-law is also clubbed. However, income earned by a minor from their own skill or talent, and income of a child with a disability, is generally not clubbed.
These rules mean that simply gifting money to family to spread the tax load often does not work. Genuine arrangements, like investing a minor's own scholarship or using exempt instruments, need careful planning.
Related terms
- Gift TaxGifts above a threshold from non-relatives are taxable in the hands of the recipient, while gifts from specified relatives are exempt.
- Sukanya Samriddhi Yojana (SSY)SSY is a government small-savings scheme for the girl child offering high, tax-free interest to build a corpus for her education and marriage.
- Capital Gains TaxCapital gains tax is the tax you pay on the profit from selling an asset such as shares, mutual funds, gold or property.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.