By proper planning it is possible to have a separate income tax file for both the husband as well as the wife. Under the Income Tax Law both husband as well as the wife would be entitled to have their separate sources of income, separate funds of their own and so consequently separate income tax files for both of them would be a reality.
There are certain situations when the income of both the husband as well as the wife would be clubbed together and there would be only one income-tax return and one assessee under the Income Tax Law. The main provision relating to clubbing of the income of husband and wife is contained in Section 64 of the Income Tax Act, 1961.
Hence, the husband as well as the wife should so plan their tax affairs in such a manner that their incomes are not clubbed or added together.
The said Section 64 of the Income Tax Act, 1961 states very clearly that in computing the total income of any individual there shall be included all such income as arises directly or indirectly to the spouse of such individual by way of salary, commission, fees or any other form of remuneration whether in cash or in kind from a concern in which such individual has a substantial interest. Thus, it is very clear that if the husband makes payment of commission or salary, etc. to his wife from his proprietary concern or a partnership firm or a corporate entity, then such payment of either a salary or commission paid to the wife would not be treated as the income of the wife because the same would be clubbed with the income of the husband in terms of the above mentioned Section 64 of the Income Tax Act, 1961.
However, if such commission or salary payment is received by the wife of the individual from some other person other than the husband or from some other business concerns where the husband is not connected, then the clubbing provisions would not apply.
Similarly, it is further provided in the said Section 64 that the provisions of clubbing as mentioned above would not apply to the wife of the individual 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. What has been stated in this paragraph shall be applicable even for the husband of the wife.
Thus, if say the husband is employed in the business organisation of the wife he should possess technical or professional qualification otherwise his salary income would be added or clubbed with the income of the wife.
Thus, both the husband as well as the wife should take due care of the aforesaid provisions relating to clubbing of income so that by taking care of the above clubbing provisions the income of the husband as well as the wife is not clubbed.
The biggest disadvantage of clubbing of the income of husband and wife is that the tax burden increases because the income accruing or arising to both of them are taxed as one tax entity. Hence the slab rate of tax goes up so also the exemptions and deductions get further narrowed down.
Thus, from the point of view of tax planning it is strongly recommended that one should avoid the clubbing of incomes of husband as well as the wife so as to achieve full tax benefits to both of them.
There is yet another occasion for clubbing of the income of husband and wife as per the provision contained in Section 64(1) (iv) of the Income Tax Act, 1961. As per this section in computing the income of any individual, there shall be included all such income as arises directly or indirectly to the spouse of an individual from assets transferred directly or indirectly to the spouse by the individual without adequate consideration.
Thus, in view of this provision the income of the wife gets clubbed with the income of the husband if the assets are transferred without any consideration. This provision would equally apply to such husband who receives certain money or assets from his wife without any consideration.
To avoid the clubbing of income of the husband and wife it is therefore recommended that the husband should not make any gift to the wife of any income producing assets so also the wife should avoid making gift to her husband so as to prevent clubbing of income.
However, if out of the gifted funds from the husband if the wife were to make investment of such gifted funds in non-taxable assets, then the clubbing provisions would not pose any problem. This is because even if the tax exempt income were to be clubbed with the income of the husband its character would continue to be tax exempt and thus there would be no additional tax liability due to clubbing of income.
If, however, you make a gift to your prospective spouse just a few days before marriage, the provisions of clubbing of income won’t apply because as on the date of making the gift the recipient was not legally your spouse. On the other hand, you need to be aware of the risk that a gift of more than Rs. 50,000 in a year received from a non-relative would be treated as income and subjected to tax. See Chapter VIII for details.
Similarly, the marriage gift from non-relative would be exempted from being taxed without any upper limit.
Hence, if the gift is planned for a prospective wife just a few days before marriage, then such gift should be given not by cash or cheque but in the form of consumer durables or sarees, etc. to avoid the impact of clubbing of the income.
If you want to have a separate income tax file both for husband and wife then you should carefully note down the provisions of the Income Tax Law relating to clubbing of income and plan the affairs in tune with the provisions of Section 64 of the Income Tax Act, 1961 so that there is no clubbing of income.
It may also be noted here that if the spouse is in need of some amount to part finance some investment either moveable or immovable — then it is possible to take loan and not gift from the spouse with reasonable rate of interest. Please do remember that taking and giving of loan transaction between the spouse does not attract the clubbing provisions of Section 64.