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Income of spouse - clubbing provisions

Rajesh (Accountant) (39 Points)

13 December 2010

Dear Members

I have a tax query. I have invested some funds in bank FD in my wife's name and some funds in my name. My query is, will my wife's interest income clubbed to my income? What if i file separate return for my wife and myself, will it still be clubbed? Note that the money invested (FD) is earned by husband and not wife.

I appreciate your expert opinion.

Regards

Rajesh

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23 Replies

CA Pratik Dharod (Bussiness) (178 Points)
Replied 13 December 2010

intrest on FD received by wife will be clubbed in Husbands income....

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Hitesh Kothari (Chartered Accountant M.No. - 134239) (326 Points)
Replied 13 December 2010

Dear Rajesh,

Interest earned on FD on Wife's name will be clubbed in your Income even though you file separate return of income for your wife.

Tax Planning : Gift cash to wife and ask her to create FD of the same. Since gfift from relative is exempt in the hands of recepient. and file your wife's return in which show it as a gift and in such case interest earned on such money will not be clubbed in your income.

Regards

Hitesh

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CA Ayush Agarwal (Kolkata-Pune-Mumbai) (27186 Points)
Replied 13 December 2010

Originally posted by : Hitesh Kothari
	Dear Rajesh, Interest earned on FD on Wife's name will be clubbed in your Income even though you file separate return of income for your wife. Tax Planning : Gift cash to wife and ask her to create FD of the same. Since gfift from relative is exempt in the hands of recepient. and file your wife's return in which show it as a gift and in such case interest earned on such money will not be clubbed in your income. Regards Hitesh

Dear Hiteshji,

Also There is Provision That if Any Income Income Earned From Gift Which Held to Be Exempted From Spouse Also Taxable.

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Sunali (Learner) (1317 Points)
Replied 14 December 2010

Agree with Ayush, Since Gift given out of natural love and affection is never considered as adequate consideration in terms of Sec 64, and even if gifted the amount of interest will be clubbed.

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CA ANKUSH AGGARWAL (CHARTERED ACCOUNTANT) (2782 Points)
Replied 14 December 2010

agree vid mr.ayush.

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Hitesh Kothari (Chartered Accountant M.No. - 134239) (326 Points)
Replied 14 December 2010

Dear Ayush,Sunali and Rajesh,

Section 64 (1)(ii) speaks about salary or commission or remuneration earned by spouse from a concern in which such individual has substantial Interest - which will be clubbed in hands of Individual unless spouse has such skills to earn that salary or comm or remuneration.

Section 64(1)(iv) speaks about Income from House Property or any other Asset. Further read Explanation 3 -

For the purposes of clauses (iv) and (vi), where the assets transferred directly or indirectly by an individual to his spouse or son’s wife (hereafter in this Explanation referred to as “the transferee”) are invested by the transferee,—

(i) in any business, such investment being not in the nature of contribution of capital as a partner in a firm or, as the case may be, for being admitted to the benefits of partnership in a firm, that part of the income arising out of the business to the transferee in any previous year, which bears the same proportion to the income of the transferee from the business as the value of the assets aforesaid as on the first day of the previous year bears to the total investment in the business by the transferee as on the said day ;

(ii) in the nature of contribution of capital as a partner in a firm, that part of the interest receivable by the transferee from the firm in any previous year, which bears the same proportion to the interest receivable by the transferee from the firm as the value of investment aforesaid as on the first day of the previous year bears to the total investment by way of capital contribution as a partner in the firm as on the said day,

shall be included in the total income of the individual in that previous year.]

If this is not the case then let me also know about the same.

Regards

Hitesh

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Hemant (AM - IA/SOX) (78 Points)
Replied 14 December 2010

First thing: Money is diverted at source from Mr. X to Mrs X. That means eventhough the amount or FD is name of Spouse still it will be taxable in the hands of Mr X. Further, there is no such difference even if seprate ITRs are filled with Authority.

Best way is what Hitesh has suggested, any gift which is irrevocable transfer does not attract to clubbbing.... if Mrs X depositing such amount and any interest arising out it will be taxed in hand rather than in hands of Mr. X

Thanks

Hemant

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Sunali (Learner) (1317 Points)
Replied 14 December 2010

Dear Hitesh ji,

As per sec 64(iv),

In computing the total income of any individual, there shall be included all such income as arises directly or indirectly—

(iv) subject to the provisions of clause (i) of section 27, ⁸⁰[* * *] to the spouse ⁸¹ of such individual from assets transferred ⁸¹ directly or indirectly to the spouse by such individual otherwise than for adequate consideration ⁸¹ or in connection with an agreement to live apart ;

In case of gifts made, the same is considered as transferred for inadequate consideration even if irrevocable. Hence, though the gifted amount is exempted u/s 56 the income arising out of the gifted asset is to be clubbed u/s 64.

However, this provision applies only in case of SPOUSE AND DAUGHTER -IN-LAW and in all other cases, the Gift works well as a tax planning measure.

The above view is only my interpretation in the light of relevant sections. Pls share your views.

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CS LLB Pulkit Gupta (https://www.facebook.com/pages/Life-and-Promises/553962034682487) (16631 Points)
Replied 14 December 2010

I totally agree with Hitesh ji's explanation..

Sunali (Learner) (1317 Points)
Replied 14 December 2010

1972] 85 ITR 194 (AP)

HIGH COURT OF ANDHRA PRADESH

Potti Veerayya Sresty

Commissioner of Income-tax

KONDAIAH AND SRIRAMULU, JJ.

CASE REFERRED NO. 42 OF 1969

JUNE 28, 1971

In the above case law, the HC held that natural love and affection does not form adequate consideration for the purposes of sec 64(iv) and any asset is gifted to spouse, the income from same is required to be clubbed.

Explanation 3 to sec 64(iv) provides only further explanation to respective section but does not restricts its scope.

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Rajesh (Accountant) (39 Points)
Replied 14 December 2010

Dear Members

Firstly, thank you very much for your responses.

To summarize based on my understanding of your opinions:

1. I will not be able to get tax relief even if i file separate returns for myself and wife.

2. Even the Gift option will not work as that would be without adequate consideration.

3. So it would be better to file one return and report total income.

Further Question:

1. Can i get any relief e.g. 80C etc for interest income? Considering in am not employed and only income is interest income.

Many thanks again,

Regards,

Rajesh

sakshi taneja (qualified ca n searching job) (341 Points)
Replied 14 December 2010

Yes, interest on your wife's FD shall be clubbed in your income as per clubbing provisions.

Amit Kr. Mishra (Executive (Accounts)) (47 Points)
Replied 14 December 2010

Originally posted by : Sunali
	1972] 85 ITR 194 (AP) HIGH COURT OF ANDHRA PRADESH Potti Veerayya Sresty v. Commissioner of Income-tax KONDAIAH AND SRIRAMULU, JJ. CASE REFERRED NO. 42 OF 1969 JUNE 28, 1971 In the above case law, the HC held that natural love and affection does not form adequate consideration for the purposes of sec 64(iv) and any asset is gifted to spouse, the income from same is required to be clubbed. Explanation 3 to sec 64(iv) provides only further explanation to respective section but does not restricts its scope.