Taxpayers often attempt to split their income among family members to reduce their effective tax bracket. Clubbing provisions counteract this behavior.
1. Clubbing of Income (Sections 60-64)
In certain situations, an assessee is taxed on income that physically belongs to another person:
- Transfer of Income without Transfer of Assets (Section 60): If an assessee transfers income to another person without transferring the asset that generates that income, the income is clubbed in the hands of the transferor.
- Revocable Transfer of Assets (Section 61): Income arising from a revocable transfer of assets is clubbed in the hands of the transferor.
- Transfer to Spouse (Section 64(1)(iv)): Income from assets transferred to a spouse without adequate consideration is clubbed with the transferor's income.
- Income of Minor Child (Section 64(1A)): All income of a minor child is clubbed with the income of the parent whose total income is higher (subject to an exemption of Rs. 1,500 per minor child), except income earned by a minor through manual work or personal skill.
2. Set-off and Carry Forward of Losses (Sections 70-80)
- Intra-Head Set-off (Section 70): Loss from one source can be set off against income from another source under the same head (e.g., loss in Business A set off against profit in Business B).
Exception: Long-term capital loss can only be set off against long-term capital gain. - Inter-Head Set-off (Section 71): Loss under one head can be adjusted against income under other heads in the same assessment year.
Exceptions: Business losses cannot be set off against Salary income. Speculative business losses cannot be set off against any other income. - Carry Forward: If a loss cannot be fully set off in the same year, it can be carried forward to subsequent years (generally up to 8 assessment years; house property and business losses can be carried forward, but speculative losses only for 4 years).