Under the Income Tax Act there is clubbing of income when an individual transfers an asset to his spouse and there is income that arises on account of this asset. This entire process ensures that the individual has to ensure that they are able to take a careful look at the situation because the income that actually arises to the spouse would have to be included in their own income.
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There is however a condition that needs to be fulfilled for this kind of clubbing to be applicable so it is better to check about the position on this front.
Clubbing
The entire process of ensuring that there is no avoidance of income by transfer of assets to a spouse comes under the overall heading of clubbing. The effort behind clubbing is to ensure that there is no avoidance of tax by an individual who has a lot of assets and hence is looking to spread this across different names.
Usually what happens is that when there is one working member in the family then there is income in one name but the other person does not have taxable income. The idea then is that the asset will be transferred to the partner or spouse so that the income in the future will arise to the other person.
This leads to a division of the income among different names but when this actually happens then the person transferring the asset will not be able to escape the tax net as the provisions of clubbing will come into effect.
Impact
The impact of clubbing is that the person who is looking to have the income reduced from their calculations and then including it in the figures of the spouse will actually not be able to do so.
The figure would have to be included in the tax working of the original holder itself so the entire effort to avoid the tax or reduce the impact would be ineligible.
This is something that the individual would want to avoid whenever they are making any gifts and hence this is something to pay attention to.
Relationship
One main factor that has to be present when this kind of working or check is undertaken is that the relationship of husband and wife has to be present at specific occasions. This is important because there cannot be a position wherein the tax authorities are able to reduce the benefit just because the asset is transferred to a spouse.
The main condition here needs some attention which is that the relation of husband and wife has to be present both at the time of giving of the asset and when the income actually arises from this asset.
This is important because it will cover one important condition which is when there is a gift of an asset before marriage and then the spouse is earning income on this after marriage.
Under the normal condition since the asset was gifted by the spouse the income would have to be clubbed with the giver. However the situation is different in this case as there was not relationship of marriage when the asset was actually transferred and this is the key part of the whole situation.
There cannot be any clubbing here and hence the assets have to be separated to see the time period when they have actually been given so that the real position is determined.
There are a lot of assets that might have been transferred before a wedding and these would have to be completely set aside and not enter any clubbing calculation for tax purposes.
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