TAX TALK-21.09.2015-THE HITAVADA
CA. NARESH JAKHOTIA
Do understand Clubbing provision before making Gift - A family route to save tax
- Whether, the income earned out of gift by crossed cheque, given to mother, sister's, minor/major daughter's will attract clubbing provisions as per Income Tax Act. Please clarify. [Sundar Krishnaswamy- email@example.com]
- My employed son is transferring funds in his father’s Account. Funds are transferred directly in his Bank account. In whose hands, the liability of tax would be there? Kindly reply. [Vatsala.Modh@licindia.com]
Gift/ Transfer of funds to the family members or investment in their name could be a genuine emotional expression. It’s all in the family. At the same time, it could be a family route to save tax burden or divert tax impact. This is precisely the reason for clubbing provision finding the place in Income Tax legislature. Taxpayers are not only taxed for their own income but also for income accruing in the hands of some other person.
What is clubbing provision:
Normally, a person is taxed in respect of income earned by him. However, in certain
special cases, income of other person needs to be included (i.e. clubbed) in the taxable income of the taxpayer and in such a cases, he will be liable to pay tax in respect of his own individual income as well as income of that other person. The situation in which income of other person is required to be included in the income of the taxpayer is referred to as “Clubbing of Income”. The obvious intention is to ensure that there is no tax escape, in case an individual routes income or assets in the family.
Not every income from gift or transfer is subject to clubbing provision. Broadly, the situations in which clubbing provisions get attracted are as under:
- Transfer of income without transfer of Asset: If any person transfers income without transferring the ownership of the asset, such income will be taxable in the hands of the transferor. For example, if Mr. Smart has invested in bank FDR an amount of Rs. 5 Lacs with interest rate @ 10%. He may give standing instructions to the bank to credit yearly interest to someone else account. In such case, even though income may not be credited to the account of Mr. Smart, still interest income would be taxable as his individual income.
- Revocable transfer of Asset: If any person transfers any asset to any other person in such form and condition that such transfer is revocable at any time during the lifetime of the transferee, the income earned through such asset is chargeable to tax as the income of the transferor. For ex. Mr. Smart transfers a house property to his brother Mr. Nice with a right to revoke the transfer during the life time of Mr. Nice. It is a revocable transfer and income arising from the house property is taxable in the hands of Mr. Smart only.
- Remuneration to Spouse: An individual is chargeable to tax in respect of any remuneration received by the spouse from a concern in which such individual has substantial interest. This provision has an exception. If the remuneration is received by spouse by the application of technical or professional knowledge or experience, clubbing provisions will not be applicable. For example, if Mr. Smart has substantial interest in M/s. Smart & Co and Mrs. Smart has received salary or commission without any technical or professional qualification or services then salary income of Mrs. Smart would be taxable in the hands of Mr. Smart even though the same is not credited to his account. [Substantial Interest: An individual is deemed to have substantial interest if he beneficially holds equity shares carrying not less than 20% voting powering case of a company or is entitled to not less than 20% of the profits in case of a concern other than a company , at any time during the previous year].
- Income from assets transferred to spouse: Where an asset is transferred by an individual to his spouse directly or indirectly, otherwise than for adequate consideration or in connection with an agreement to live apart, any income from such asset is deemed to be the income of the transferor. For example, like in the first example given above, if Mr. Smart has transferred a FD itself in favor of his wife, still the interest income would be taxable as income of Mr. Smart even though FD is in the name of Mrs. Smart & interest is received by Mrs. Smart.
- Income from asset transferred to son’s wife: If an individual, directly or indirectly transfers any asset, without adequate consideration to son’s wife, income arising from such asset has to be included in the income of the transferor. For ex. Mr. or Mrs Smart transfer’s rented out house property to their son’s wife without adequate consideration, rental income would be includible in the hands of original owner i.e., Mr. or Mrs. Smart who were owning the property prior to transferring it without adequate consideration.
- Income from asset transfer to a person for the benefit of spouse or son’s wife: If an individual, directly or indirectly transfers asset, without adequate consideration to any other person for the benefit of his/her spouse /son’s wife, income arising from such asset directly or indirectly is to be included in the income of the transferor. For example, if Mr. Smart transfers his immoveable property to his brother Mr. Nice without adequate consideration, subject to the condition that, the rental income from this property will be utilized for the benefit of Mrs. Smart or son’s wife of Mr. Smart, rental income would be includible in the income of Mr. Smart only.
- Income of a minor child: All income which arises to the minor shall be clubbed in the income of his parents. Income will be included in the income of that parent whose total income is greater. This case has two exceptions: (a) Income of minor child suffering from specified disability (b) Income of minor child on account of manual work or involving application of his skill/talent etc.
In the case of first query, amount gifted to mother, sister or major daughter or major son would not be subject to the clubbing provision. Similarly, in the second query, amount gifted by son to his father by transferring the fund in his account would not be subject to the clubbing provision in the hands of son.
I have purchased plot for residential purpose on 28/05/2015 for consideration value of 2,50,000/-. Recently, I have to come to know about section 194IA. Kindly explain scope and applicability of this section in my case. Who is responsible to pay income tax? How? What is the meaning of “Issuing of TDS certificate”? What exactly I have to do to settle this matter? State the amount of tax payable with interest? The sum of 1% of total value i.e., Rs. 2,500/- (1% of 2,50,000) is appearing on registry papers. I could not understand whether the tax has to be deposited or not? [Parmanand Tekade- firstname.lastname@example.org]
1. All the taxpayers who are purchasing an immovable property from resident taxpayer (other than prescribed RURAL agricultural land) of the value of Rs. 50 Lacs or more are duty bound to deduct & remit income tax (i.e., TDS) @ 1% from the payment made to the seller against purchase of the property u/s 194IA. TDS provision is not applicable where the consideration for transfer of an immoveable property is less than Rs. 50 Lacs.
2. In your specific case, as the property purchased by you is below Rs. 50 Lacs, there is no liability to do any TDS. It appears that you have wrongly done TDS @ 1% on the purchase value. Now, you can adopt one of the following practical remedy to rectify t the mistake:
a] You may execute the correction deed before the registrar mentioning the fact of wrong TDS mention at the time of executing original sale deed & making payment of Rs. 2,500/- wrongly retained by you to the seller or
b] You may remit back the amount of wrongly retained TDS to the seller by an account payee instruments and may take the receipt along with clarification letter covering the error of TDS done.
[The author is a practicing Chartered Accountant from Nagpur.
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