Section 60 of the Income tax rules covers clubbing of income – which specifies conditions under which if A invests for B, the income earned by B on the investment is taxable in the hands of A. Though this section aims to curb tax evasion, an in depth knowledge of the provisions of this section will help one know about the conditions under which the clubbing of income does not happen and how this can be used to bring down his or her tax liability.
Investments made in the name of children –
- If the child is a minor, any income earned on investments done by the parent in the child’s name will be clubbed with the income of the parent with higher income. This is over and above a small exemption of Rs. 1500/- per annum available per child on these investments. Exceptions to this clubbing rule are minors who earn their own income through special skills like acting, cash prizes in competitions and events. In such cases they are assessed separately and clubbing doesn’t happen.
- If the child is a major, above 18 years of age, money can be “gifted” to them and put in suitable investment avenues. The income earned on such investments is not clubbed with the parents as the child is also a tax assessee and enjoys the basic exemption limit of Rs. 2 lakhs available to an individual.
TIP – If your child is a minor, invest in long term deep discount bonds or similar investments which would mature after the child becomes a major. Such bonds pay the interest/are taxed on maturity. And since the child would already become a major by then, the income would no longer be clubbed with that of the parent.
Investments made in the name of spouse –
Income earned on investments done/money gifted by a husband for his wife or vice versa would be clubbed with that of the former. If the amount to be invested is substantial, it is important to know that any income generated in future out of this income will not get clubbed. For eg- Mr. A places a fixed deposit of Rs 1 crore in Mrs. A’s name @ 10 % p.a for a year. The annual interest income of Rs 10 Lakhs is taxable in the hands of Mr. A. Now if this entire sum of Rs 1.1 crore is re-invested for a year at the same interest rate, out of the Rs. 11 lakhs earned as interest, only 10 lakhs would get clubbed. Rs 1 Lakh earned on the re-invested interest of Rs. 10 lakhs is not clubbed and is treated as the spouse’s income.
TIP- Instead of gifting money to your spouse, “loan” it to her for making investments, buying a property etc. The spouse would get a regular income by way of dividends/rent etc. out of which she would pay a nominal interest to her husband on the borrowed capital. The income earned thus would be her own and not clubbed with that of the husband’s.
Investments done in the name of parents-
Gifting money to one’s parents is another way of saving on taxes, as the income earned doesn’t get clubbed and at the same time, since the parents are most likely to be senior citizens above 60 years of age, they would enjoy a higher income tax exemption limit of Rs 2.5 lakhs per annum. And if the parent is above 80 years of age (the very senior citizen category), the exemption limit is Rs. 5 lakhs.