Tax liability that you didn’t know about

In India, family isn’t a unit of assessment. So much so, you can normally go ahead and file your return, without worrying about the tax liability of your near and dear ones.

But did you know in the following exceptional circumstances, you have to include the income of your near and dear ones in your own income and pay tax accordingly:
1) If you had gifted any of your property to your spouse, the income there from would be treated as yours though the asset itself is no longer yours;
2) If you have a minor child, its income is taxed in the hands of its parent, father or mother, whose income is greater except when the minor earns income through his own skill or labor as was the case with the young wicket-keeper Parthiv Patel;
3) If you have gifted any property to your daughter-in-law, income there from would be treated as yours though the asset itself is no longer yours.
You cannot afford to be complacent about these rules that are known among the tax experts in their own jargon as – the clubbing provisions.

Let us understand with an example. Your income is Rs 5 lakh and your minor daughter’s is Rs 2 lakh. You might think your tax liability is just Rs 25,000 @ 10 per cent on Rs 2, 50,000 with the first Rs 2.5 lakh exempt from tax.

You couldn’t be more wrong because your tax liability is actually Rs 65,000. Your total income is Rs 7, 00,000 on which the tax is Rs 25,000 on first Rs 5 lakh and Rs 40,000 @ 20 per,cent on the remaining Rs 2 lakh.

You can ignore the clubbing provisions only at your own peril because interest for non-payment of advance tax plus penalty would be levied for tax evasion.

Ditto for spouse’s income. It is common for a spouse to open fixed deposit with his money in the name of his wife. What is not common though is remembering the clubbing provisions. In this case, if the deposit is of Rs 20 lakh, carrying 8.5 per cent interest, the husband has to include Rs 1,70,000 in his income, with his wife not bothered about any tax.

Of course the husband can claim section 80C benefit twice over, one on one’s own income and second time on his wife’s income. He could have also taken some forward-looking action mainly premarital transfers. Yes, gifts before marriage are outside the pale of the clubbing provisions.

So much so, if you are a bachelor, make gift of income-yielding properties to your fiancée a day before the date of marriage. This is an effective tax planning tool. Another tool is swap if you had missed the premarital bus – exchange your house for your wife’s jewels. If they have a matching value, there is no gift and hence no clubbing!

These two precautions can be taken to ward off clubbing provisions emanating out of gifts to one’s daughter-in-law as well. One doesn’t know why the income tax department is not proactive in sufficiently publicising these clubbing provisions given the prospect of making a rich harvest of tax revenue.

In passing it may be mentioned that the following relatives who are also near and dear do not fall within the purview of clubbing: a) Major children; b) Son-in-law; and c) Parents
Gifts to major children do not give rise to clubbing. Nor does gifts to parents. Small wonder, senior citizens lend themselves as effective tax planning tool for youngsters. The generous tax exemption to very senior citizens – no tax up to Rs 5 lakh – makes them the most sought after if not the respected member of the family.

By S MurlidharanJul