Guide to .. Tax Management ,Tax Planning and Tax Saving
 

How an NRI can Avoid Clubbing of his Incomes and Wealth with that of his Spouse and Children !

  1. Income From Joint Accounts Or Joint Investments by NRI : Is it Liable To Be Clubbed For Tax Purposes in case of NRI ?
  2. When is the income of wife liable to be clubbed with the income of her husband, and vice versa ? in case of NRI
  3. When is the income of a Minor Child liable to be Clubbed with that of a Parent in case of NRI ?
  4. When is the Income of Daughter-In-Law Liable to be Clubbed with that of her Father-In-Law or Mother- In-Law in case of NRI ?
  5. Income of a Major Child cannot be Clubbed with that of his Parent in case of NRI
  6. When is the Income Of An HUF From Self-Converted Assets Liable To Be Clubbed In The Members’ Hands in case of NRI ?
  7. When is income from Assets Received on Partial Partition of an HUF liable to be Clubbed with the Income of the HUF in case of NRI ?
  8. Joint Ownership Of House Property: Does It Make The Income Of A Husband, Wife, And Children Liable To Be Clubbed Together in case of NRI?
  9. How To Avoid Clubbing Of The Wife’s Wealth With That Of The Husband’s In Case Of NRI
  10. Gift From Non-Relatives Now Taxed As Income In Case Of NRI

1. Income From Joint Accounts Or Joint Investments by NRI : Is it Liable To Be Clubbed For Tax Purposes in case of NRI ?

Very often it is found that a non-resident maintains a bank account jointly with his wife and/or children. Similarly, it is seen that a nonresident Indian buying shares or debentures or house property or other movable or immovable property, keeps them in his own name jointly with his wife or any other member of the family. In this connection, a non-resident should remember that the maintenance of joint bank accounts or holding of joint investments alone would not make the income liable to assessment separately in the hands of the persons in whose name the joint accounts are kept or who hold the joint investments. Thus, the mere fact that an account is held jointly or that an investment is held by two or more persons together would not affect the liability to income tax or wealth tax. The main criterion of deciding as to the correct persons who are to be responsible for paying income tax in respect of the income ofjoint accounts or joint investments is the true ownership of such accounts or investments. For example, if a nonresident Indian, out of money belonging to him, is operating a bank account or a bank fixed deposit account jointly with his wife, he alone would be liable to income tax, if any, in respect of the income from such an account. Likewise, if a non-resident Indian out of funds belonging to him makes a joint investment in shares of Indian companies, he alone, would he liable to income tax, if any, in respect of the dividend income from shares so held. If, however, a joint bank account or joint investment is out of money belonging to the persons actually owning the funds, then the extent of their individual ownership in the joint account would be considered for income tax and wealth tax for individual tax purposes separately.

For example, if a non-resident Indian invests Rs. 4,00,000 in the HUDCO Bonds, and his wife invests Rs. 2,00,000  out of funds belonging to her in buying HUDCO Bonds and these Bonds worth Rs. 6,00,000 are held in joint names of the husband and the wife, the income on such Bonds would be liable to be treated separately in the individual assessment of the husband and the wife in the ratio of 2:1.

NRI Tax Planning & Tax Saving

2. When is the income of wife liable to be clubbed with the income of her husband, and vice versa ? in case of NRI

Under the provisions of Section 64(1) of the Income Tax Act there are various situations under which the income of a wife is not considered for tax purposes in her own hand but is liable to be clubbed or added with the income of her husband. In certain situations the income of the husband could be clubbed with the income of the wife under the provisions of Section 64(1). Hence, a non-resident should adopt proper tax planning with a view to avoiding such clubbing of income. For doing so, it is necessary to understand the relevant provisions of Section 64(1) as given below so that such clubbing can be avoided altogether by non-resident Indians.

  1. Under the provision of Section 64(l)(iii) the salary, commission, fees or other forms of remuneration, whether in cash or in kind, received by the wife of a non-resident Indian from a concern in which the non-resident Indian has a substantial interest would be liable to be added to the income of the non-resident Indian. However, this provision would not apply if the wife possesses technical or professional qualifications and the income is solely attributable to the application of her technical or professional knowledge and experience. In the case of a company, if equity share carrying 20% or more of voting power at any time during the previous year are owned beneficially by the non-resident Indian or by him along with one or more of his relatives, the non-resident Indian would be deemed to have a substantial interest in the company. In any other case, like an association of persons or a partnership firm, non-resident Indian would be considered to have a substantial interest in the concern if he, along with one or more of his relatives, is entitled in the aggregate at any time during the previous year to 20% or more of the profits of such a concern. Hence, whenever a non-resident and his relatives are substantially interested in a concern, he should avoid paying any remuneration to his wife, unless the wife is technically or professionally qualified. If this precaution is not taken, then the remuneration so paid to the wife would be added to the income of the non-resident. This is equally applicable in the case of the wife where she is substantially interested in the concern and pays some remuneration to her husband who is not technically or professionally qualified.

  2. Under the provisions of Section 64(1)(iv) if a husband makes any gift to his wife, the income from such gift would be liable to be added his income. Similarly, in the case of wife. Where, however, a transfer of money or funds or assets takes place from the husband to the wife or vice versa for an adequate consideration, this provision would not apply. Another situation in which this provision is not applicable is where the transfer of assets or gifts is made in connection with an agreement to live apart. Hence, a nonresident should never make any gift to his wife so that he can avoid the clubbing of income from gifted assets in his own hands. If, however, the gift is made by a husband to his wife before marriage, then this provision would not apply.

  3. Another provision in the matter of clubbing of income of the husband and wife is Section 64(l)(vii) under which a gift made to any other person or to the trustees of a trust for the benefit of the spouse of a non-resident Indian would be liable to be clubbed in the hands of the donor spouse. Hence, a non-resident Indian should not only refrain from making a gift directly to his wife but should also not make any gift indirectly in favour of the trustees f a trust for the benefit of his wife, so that the clubbing of income arising to the wife out of assets so gifted by the husband to the wife is avoided. This provision is equally applicable in the case of a gift by the wife to a trust for the benefit of the husband.

3. When is the income of a Minor Child liable to be Clubbed with that of a Parent in case of NRI ?

An NRI can enjoy complete exemption from income-tax while remaining an NRI and thus, he need not pay any income-tax under the Income Tax Act in India. However, NRIs deciding to return to India on a permanent basis are often perplexed as to the tax planning to be adopted by them to be able to have zero income tax level for their earnings in India. One important point that should be remembered by an NRI returning to India on a permanent basis is that his income, like interest on non-resident (external) account which was completely exempt when he was an NRI would no longer be so exempt when he returns to India. However, in respect of his foreign income on the investment allowed by the RBI to be kept abroad, he would not be liable to tax in India so long as he remains a resident but not ordinarily resident in India. But if an NRI carries on any business abroad while remaining a resident in India, he would not be liable to tax thereon in India. However, a zero tax liability can be obtained by an NRI returning to India on Indian income by adopting proper tax planning in respect of his investment in his name as well as in the names of his family members.
The provisions relating to the clubbing of income of a minor child with the income of the parent or the grand-parent, as the case may be, have undergone a great deal of change due after the amendments made to Section 64, by the Finance Act, 1992, with effect from the Assessment Year 1993-94. Under the provisions of Section 64 (IA) as inserted by the Finance Act, 1992, with effect from the Assessment Year 1993-94 in computing the total income of any individual, whether a resident or a non-resident, the entire income accruing to his minor child would be clubbed i.e., included in that income. Thus the income of the minor child from gifts made by any one and not necessarily the parents or grand-parents only, by way of interest income or rental income, etc., on investments made out of the funds of the minor child would be clubbed with the income of the parent.
However, the clubbing provision would not apply if the income of the minor child accrues or arises on account of any

  1. manual work done by him; or

  2. activity involving application of his skill, talent, or specialised knowledge and experience.

Thus if a grown up child aged, say 14 or 15, earns some income out of the exercise of his special talent in computer science, games, sports, shorthand, etc., the income so derived by the minor would not be clubbed with the income of his or her parent.
The Finance Act, 1994 had, with effect from the Assessment Year 1995-96, provided that the clubbing provisions of Section 64(IA) would not apply in the case of a disabled child suffering from any disability of the nature mentioned in Section 80-U.
The question may be asked to the particular parent with whose income the income of the minor has to be included. For this purpose, it is provided that where the marriage of the parents of a minor child subsists, then the clubbing has to be done with the income of that parent whose total income, excluding the income under Section 64(1A), is greater. Where, however, the marriage of the parents does not subsist, then the clubbing has to be done with the income of that parent who maintains the minor child in that previous year. Further, while any such income is once included in the total income of her one parent, any such income arising in any succeeding year would not be included in the total income of the other parent, unless the Assessing Officer is satisfied, after giving that parent an opportunity of being heard, that it is necessary to do so.
Under the provisions of Section -10(32) of the Income Tax Act complete exemption is enjoyed by the parent in respect of the income of the minor child so included to the extent of `. 1,500 for each minor child.

A minor can, however, now be admitted to the benefits of partnership in a partnership firm even where his father or mother is a partner, without invoking the clubbing provisions of Section 64. Thus, with effect from the Assessment Year 1993-94 the share income of a minor child on his being admitted to the benefits of the partnership will not be clubbed with the income of the father or the mother but would be completely exempt from income tax under provisions of Section I 0(2A). Hence proper tax planning can be adopted in respect of the funds of the minor child so as to prevent the clubbing of the income of the minor child with that of his parent by admitting the minor child, wherever it is possible, in a partnership firm. In such a case the entire share income received by the minor would be completely exempt from income tax and there would not be any scope of clubbing such share income with that of the parent. Likewise, if the minor has any income which is completely exempt from income tax under the provisions of Section 10, like interest on deposits in PPF account, etc., the clubbing provisions of Section 64(IA) are not applicable simply because such income is fully exempt from income tax.

4. When is the Income of Daughter-In-Law Liable to be Clubbed with that of her Father-In-Law or Mother- In-Law in case of NRI ?

Normally, every major person in India is entitled to have income in his own hands in such a manner that he is liable to pay income tax thereon in his own individual assessment. There is a provision of clubbing of income arising to the daughter-in-law which can sometimes be clubbed with the income of the father-in-law or the mother-in-law. Thus, it is provided in Section 64(1 )(vi) that if the daughter-in-law receives any gift from the father-in-law or mother-in-law, the income arising out of or in relation to such gifts is considered as the income not of the daughter-in-law, but of the father-in-law or the mother-in-law making the gift.
Thus, the father-in-law or the mother-in-law should never make any gift to his or her daughter-in-law. Likewise, no gift should be made in favour of any trust for the benefit of the daughter-in-law by the father-in-law or the mother-in-law. Otherwise, under the provisions of Section 64(1)(viii) such income, which is for the immediate or deferred benefit of the son’s wife, would be liable to be clubbed with the income of the father-in-law or the mother-in-law so making the gift.
Hence, whenever the father-in-law or the mother-in-law of a non-resident Indian, like any other Indian, wishes to make a gift out of love and affection to their daughter-in-law they should refrain from exercising such love through the medium of gift. The gift may be made by any other relative, like her maternal uncle, paternal uncle, her father, her mother, her brother, or the uncle-in-law or aunt-in-law, grand-father-in- law or grand mother-in-law. In topic 3 above, we have seen that income out of gift made by the husband to the wife and vice versa is liable to be clubbed together. Hence a married woman should not receive any gift from three persons, namely, her husband, her father-in-law, and her mother-in-law, so as to avoid the risk of clubbing of income under the provisions of Section 64(1).
It should be carefully noted by a non-resident Indian that he should not make any such gifts to his daughter- in-law even when he is outside India because when such money is brought into India by the daughter-in-law, it is liable to be clubbed with the income of the non-resident Indian when he returns to India.

Thus, for the purposes of tax planning by a non-resident Indian, this aspect should be kept in mind so that the non-resident Indian after his return to India is not saddled with the additional burden of paying income tax on the income earned by the daughter-in-law out of gifts made by him in the past.

5. Income of a Major Child cannot be Clubbed with that of his Parent in case of NRI

A person becomes a major on the completion of 18 years. Thus at any time during any previous year if a person becomes a major, he is considered to be a major for the entire period of the previous year and not necessarily in respect of the income earned after the date of attainment of majority. This is an important aspect which should be kept in view by a taxpayer for the adoption of tax planning in the case of those minor children who are likely to attain majority in a particular year. However, if there is any income of a major child, whether son or daughter, even out of gifts made by NRI or anyone else, the clubbing provision of Section 64 would not apply. The entire income of the major child would be assessed separately and independently in the hands of the major child only.

6. When is the Income Of An HUF From Self-Converted Assets Liable To Be Clubbed In The Members’ Hands in case of NRI ?

An individual governed by the Mitakshara school of Hindu law is entitled to convert his self-acquired property through his unilateral action of impressing such self-acquired property or separate property with the character of property belonging to an HUF or throw it to the common pot of the HUF. But such an action is not viewed favourably by the Income Tax Law. It is provided in Section 64(2) that when any individual, who is a member of a Hindu undivided family convert his self-acquired property at any time after 31.12.1969 into HUF property, for the proposes of computation of the total income of such individual the income from the converted property is to be deemed to arise to the individual and not to the family. Because of the clubbing provision it is generally not advantageous for a Hindu to convert his self-acquired property into FIUF property. Rather, the HUF may receive gifts from non- members of the HUF. In the latter case, the clubbing provision would not apply. However, where a full partition is desired and several Hindu undivided families are to be formed by the full partition, it may be effected amongst the members of the family. Then each unit, headed by the major eldest male member with his own wife, and children, will be deemed to constitute a separate HUF. The individual who converts his self-acquired property into HUF property is deemed to have transferred indirectly his property to his spouse or minor child. The property allotted on partition to the major members of the family is not considered to be indirectly transferred by him to them and hence, the clubbing provision after partition does not apply in respect of such partition of the converted assets. A non-resident Indian can take advantage of this aspect of tax planning in those cases where he has grown up children who are in turn married and have their separate branches of HUF and where there is no separate HUF file for them.

7. When is income from Assets Received on Partial Partition of an HUF liable to be Clubbed with the Income of the HUF in case of NRI ?

One of the important methods of tax planning in India has been to make a partial partition of the assets of an HUF so that the income of the family is divided amongst various hands in such a manner that the least income tax is paid by the HUF and the members of the HUF taken together. Hence, partial partition of an HUF after 31.12.1978 has been de-recognised. It is provided in Section 171 (9) of the Income Tax Act that where a partial partition takes place amongst the members of a Hindu undivided family after 3 1.12.1978, such a family shall continue to be liable to be assessed under the Income Tax Act as if no such partial partition had taken place’. Further, each member or group of members of such a family immediately before such partial partition and the HUF shall be jointly and severally liable for any tax, penalty, interest, fine or any other sum payable under the Income Tax Act by the family in respect of any period, whether before or after such partial partition. Hence, tax planning requires that there should not be any partial partition of a Hindu undivided family. If at all partition becomes necessary, then full partition under the provisions of Section 171 may be made amongst the different members of the family. Thus, from the point of view of proper tax planning a non-resident Indian like any other resident person should never make a partial partition of the assets of his undivided family of which he may be the Karta or Manager. Rather, if he has major sons in the family he may make full partition of the family so that his major sons in turn may have their independent and separate HUFs.

8. Joint Ownership Of House Property: Does It Make The Income Of A Husband, Wife, And Children Liable To Be Clubbed Together in case of NRI?

A non-resident Indian is not liable to pay income tax on the full income from any property jointly owned by him with his wife. The only precaution that he should take is that there is no gift made by him to his wife, If this precaution is taken, the joint ownership of movable as well as immovable assets will entitle each of the owner to claim separate income tax assessment in his or her hands independently. Thus, a non-resident Indian could own shares of a limited company out of money belonging to him as well as out of separate funds belonging to his wife as also the funds of a major child. Thus, if the shares in a limited company are owned in three names with the funds contributed by the three persons as mentioned earlier, each of the persons would be liable to be taxed separately and not be clubbed together. In particular, this provision is recognised for the purpose of joint ownership of house property. Thus, it is provided in Section 26 that where property consisting of building or buildings and lands appertaining thereto is owned by two or more than two persons and their respective shares are definite and ascertainable, such persons in respect of such property are not to be assessed as an association of persons, but the share of each person in the income from the property would be included in his total income separately. In the case of other investment, like shares, debentures, etc., there is sometimes a risk of joint investment being considered as the investment of ‘an association of persons. In the interest of avoiding confusion and clubbing of income, a non-resident Indian should not make joint investments for movable assets. But as regards immovable house property, because of the clear cut provision contained in Section 26 there is no risk if it is purchased out of separate and independent funds belonging to the husband, wife and the major children, namely, all of them together, and it would not be liable to be clubbed. Rather, the income of each co-owner would be liable to separate assessment independently. This aspect of tax planning can be taken care of while purchasing house property, particularly where the house property is big and saving of income tax and wealth tax becomes important.

9.  How To Avoid Clubbing Of The Wife’s Wealth With That Of The Husband’s In Case Of NRI

The provisions of clubbing of income of certain close relatives for the purpose of income tax, as discussed are equally relevant for the purposes of wealth tax. Hence, a non-resident Indian, like any other resident person, should so adopt proper tax planning that there is no clubbing of wealth of his wife with his own wealth. Thus, he should refrain from making any gift whether out of assets outside India or assets in India to his wife. That is why the wife of the non-resident Indian should also not make any gift of any assets, whether out of funds in India or funds outside India to her husband. Likewise, the non-resident Indian should not make any gift of any property in favour of the daughter-in-law or to any trust in favour of or for the benefit of the daughter-in-law. If these precautions are taken, the gifted assets are not to be clubbed with the assets of the person making the gift under the provisions of Section 4(1) of the Wealth Tax Act. This aspect of tax planning is very relevant for saving wealth tax and particularly for saving oneself from the clubbing provisions of wealth tax. Of course, the taxable wealth of a minor child would be clubbed with the wealth of the NRI under Section 4(1) of the Wealth Tax Act from the Assessment Year 1993-94. Usually, it is seen that a non-resident transfers certain amount of money out of his own funds in favour of his wife and minor children, under the impression that each one of them would be liable to wealth tax independently. In particular he is under the impression that for seven years there is complete exemption of the assets from the payment of wealth tax if he returns to India permanently. Though this is true, after the end of the seven-year period the transferred assets in favour of wife and minor children would be liable to be clubbed for the purposes of wealth tax in his hands.

10. Gift From Non-Relatives Now Taxed As Income In Case Of NRI

If you receive a gift then please be a little careful specially in view of the new amendment introduced by the Finance (No. 2) Act, 2004 whereby a gift received on and after 1-9-2004 from a non-relative would be treated as income and taxed accordingly. However, these provisions would not apply in respect of gifts, etc. received upto Rs. 25,000 till the A.Y. 2006-2007 and upto Rs.50,000 afterwards in a year from non-relatives. However, gifts received on the occasion of marriage would be exempted without any upper limit. The gift from relatives can be received of any quantum. However, these provisions apply only with reference to gift by cash, cheque or any other mode of payment like gift cheques and travellers cheques. Hence, gift by way of jewellery, property, shares, paintings, etc. even from non-relatives can be received without tax till the A.Y. 2009-2010. From the A.Y. 2010- 2011, more specifically on or after 1-10-2009 even gifts in kind (above the exempted limit) are taxable as income.

However, in order to avoid hardships in genuine cases; it is also provided to exclude certain sums from the scope of the new definition of income under Section 2(24). The sums which shall not be included in the income are:

the sum received by, or credited in the account of

  1. any individual from a relative out of natural love and affection, or

  2. any individual or Hindu undivided family under a Will or by way of inheritance, or

  3. any employee or the dependent of the deceased employee from an employer, by way of bonus, gratuity or pension or insurance or any such other sum solely in recognition of the services rendered by the employee, or

any sum received in contemplation of death of an individual or karta or member of a Hindu undivided family, or

any income referred to in Section 10 of the Income Tax Act or any other income which is exempt or not included in the total income under the Act or

any sum received on account of transfers referred to in Section 47 under Income Tax Act.
The expression “relative” for the purpose of this provision would be:

  1. spouse of the individual.
  2. brother or sister of the individual,
  3. brother or sister of the spouse of the individual,
  4. brother or sister of either of the parents of the individual,
  5. any lineal ascendant or descendant of the individual,
  6. any lineal ascendant or descendant of the spouse of the individual, and
  7. spouse of a person referred to in items (ii) to (vi) mentioned above.

On and from F.Y. 2006-07 relevant to the A.Y. 2007-08 the aggregate value upto Rs. 50,000 will be exempted from the purview of being taxed as Income from other sources. Moreover, the sum of money received from local authority, or any fund or foundation or university or hospital or other medical institution as mentioned in Section 10(23 C) or the trust or institution registered under Section 12AA would be exempted without any upper limit.

This means that if any gift is received, say from a Charity Trust by a meritorious student for higher studies, say of Rs. 4 lakh, then such amount would be exempted from being taxed as income as per Section 56 . Similarly, if any help is received from some Trust, etc. for medical treatment, say of Rs. 2 lakh then also it would be tax exempt. However, this benefit would not be available on grant for education or medical help if received from an institution from abroad because the same is not covered in the exemption clause as the exemption only is for Trusts or Institutions mentioned in Section 10 (23C) or Section I2AA of the Income Tax Act, 1961. From 1-7-2010 even the gift of “Bullion” from non-relatives would be taxed as income.

The above mentioned provisions would also be applicable to gifts made by an NRI to a non-relative Indian.
 

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