Filing Taxes with Foreign Income
Clubbing of income in ITR: A lot of taxpayers think that once money or an asset is given to a husband or wife, the income from it will be taxed only in that spouse’s name. That sounds simple, but tax law does not always work that way. Under the clubbing rules in Section 64, if an asset is transferred without proper payment, the income from that asset can still be taxed in the hands of the person who gave it. The Income Tax Department says this can apply even if the spouse changes the form of the asset later.
This rule is meant to stop tax saving by shifting income to a family member who pays less tax. The law checks who really put in the money first. If the transfer was just a gift and not a proper sale or exchange, the income may not stay with the spouse for tax purposes. That is why clubbing often matters when one spouse gives money to the other for fixed deposits, mutual funds, shares, bonds, or similar investments.
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The most common case is when a husband gives money to his wife, or a wife gives money to her husband, after marriage and the other spouse invests it. The interest, dividend, rent, or other income from that original money can be added back to the giver’s income.
“Clubbing usually comes into play when someone tries to shift income to a family member to save tax, and the law simply adds that income back to the original earner. The most common case is a husband gifting money to his wife, who then invests it, the interest or gains from that get clubbed in the husband’s hands under Section 64,” said Pravin Kakade, Panel Member ICAI.
Interest from fixed deposits, bonds, mutual funds, and similar investments made from gifted money can be taxed in the transferor’s hands under “Income from Other Sources.” If the spouse later reinvests that interest and earns fresh income from the reinvestment, that later income is usually taxed in the spouse’s own hands. The clubbing rule normally follows the original asset, not every new rupee that grows from it.
Rental income can also be clubbed. If a house or flat is transferred to a spouse without adequate consideration, or if the property was bought using gifted money, the rent can still be taxed in the hands of the person who transferred the asset. Even then, the usual deductions under “Income from House Property” can still be claimed before the income is clubbed.
Clubbing is not automatic in every spouse-to-spouse transfer. The Income Tax Department says it does not apply if the asset was transferred before marriage, if the transfer was for adequate consideration, or if it was made under an agreement to live apart.
The department also says clubbing does not apply where the spouse earns income from their own technical skill, professional qualifications, or personal ability, even if the other spouse has a big interest in the business.
That means the source of the money matters a lot. If the spouse earned it through their own work, that income normally stays with them. If the money came from a gift and the gift rules apply, the tax can bounce back to the giver like a boomerang in a suit.
The most common mistakes are simple but costly. People forget to report income from assets gifted to a spouse. Some ignore clubbed income from a minor child. Some assume every family gift is tax free.
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That is risky because the tax department now gets a fuller picture through AIS and Form 26AS, which contain financial transaction details and tax-related information. Mismatches are easier to spot now.
This is why the right person has to report the income in the return. As Shreya Gupta Goyal, Chartered Accountant, said, “Clubbed income should be reported by the taxpayer in whose hands it is taxable under the relevant head of income, and failure to disclose it correctly may result in additional tax liability, interest, penalties and notices from the Income Tax Department,” says Shreya Gupta Goyal, Chartered Accountant.
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