Incidence of Tax – Who Pays Tax on What?
Your 10-year-old child earns ₹1 lakh from FD. Who pays tax? You! (Parent). Your wife earns ₹2 lakh gift from your income. Who pays? You! Welcome to incidence of tax and clubbing provisions.
What is Incidence of Tax?
Definition: Determination of who is liable to pay tax on a particular income
Questions answered:
- Whose income is it?
- Who should pay tax on it?
- Can income be shifted to avoid tax?
General Rule
Incidence falls on: Person who earns the income
Example:
- Rahul earns salary → Rahul pays tax
- Priya earns rent → Priya pays tax
Simple! But there are exceptions...
Clubbing of Income (Sections 60-64)
Anti-avoidance provision: Prevent tax evasion by transferring income to family members in lower tax brackets
Concept: Income of another person clubbed with your income
Section 60 - Transfer of Income Without Transfer of Asset
Rule: If you transfer income (not the asset itself) → Income clubbed with you
Example:
❌ Wrong:
- Father owns FD (₹10 lakh)
- Says "Interest goes to son" (but FD still in father's name)
- Incidence: Father pays tax (income clubbed)
✅ Right:
- Father transfers FD itself (₹10 lakh) to son
- Son's name in FD
- Incidence: Son pays tax
Key: Must transfer asset, not just income!
Section 64(1)(ii) - Minor Child's Income
Rule: Income of minor child clubbed with parent's income (higher-earning parent)
Exception: Income from manual work or talent (sports, acting) → NOT clubbed
Exemption: ₹1,500 per child per year (max 2 children)
Example 1:
Child's FD interest: ₹10,000
- Clubbed with: Parent (say mother, higher income)
- Exemption: ₹1,500
- Taxable in mother's hands: ₹8,500
Example 2:
Child won ₹5 lakh in chess tournament (talent):
- NOT clubbed (talent/manual work exception)
- Child files separate return
Example 3:
Father has 2 children with FD interest:
- Child 1: ₹8,000
- Child 2: ₹12,000
- Total: ₹20,000
- Less exemption: ₹1,500 × 2 = ₹3,000
- Clubbed with father: ₹17,000
Section 64(1)(iv) - Spouse's Income from Asset Transferred
Rule: If you gift asset to spouse (without adequate consideration) → Income from that asset clubbed with you
Example:
Husband gifts ₹10 lakh to wife (from his savings)
- Wife invests in FD
- Interest: ₹80,000/year
- Clubbed with: Husband
BUT if wife reinvests the interest:
- Interest on interest → NOT clubbed (wife's own income now)
Not clubbed if:
- Transferred before marriage
- Adequate consideration paid
- Income from wife's own earnings
Section 64(1)(vii) - Son's Wife's Income
Rule: Income of son's wife from asset transferred by you → Clubbed with you
Example:
Father-in-law gifts ₹5 lakh to daughter-in-law
- She invests, earns ₹40,000 interest
- Clubbed with: Father-in-law
Section 64(1A) - HUF Member Converting Individual Property to HUF
Rule: If you convert self-acquired property to HUF property → Income clubbed with you
Example:
Individual bought plot for ₹50 lakh
- Transfers to HUF
- HUF earns ₹2 lakh rent
- Clubbed with: Individual (who transferred)
Summary of Clubbing Provisions
| Section | Whose Income Clubbed | With Whom |
|---|---|---|
| 60 | Income transferred (not asset) | Transferor |
| 64(1)(ii) | Minor child's income | Parent (higher income) |
| 64(1)(iv) | Spouse's income from gifted asset | Spouse who gifted |
| 64(1)(vii) | Son's wife's income from gift | Father-in-law/Mother-in-law |
| 64(1A) | HUF income from converted property | Individual who converted |
Representative Assessee (Section 160)
When taxpayer cannot pay (deceased, minor, lunatic, non-resident):
1. Deceased Person (Section 159)
Example:
Mr. Sharma died in Dec 2023
- Income for FY 2023-24: ₹5 lakh (April-Dec 2023)
- Who files return?: Legal heir/executor
- Tax paid from: Estate of deceased
2. Minor (Section 160)
Guardian files return and pays tax (for exempt income like talent)
3. Non-Resident (Section 163)
Agent/representative in India pays tax
Practical Examples
Example 1: Family Tax Planning (Wrong Way)
Father (₹20 lakh income, 30% bracket):
- Transfers ₹10 lakh property to wife (homemaker, no income)
- Property earns ₹1 lakh rent
- Thinks: Wife pays tax at 5% = ₹5,000
Reality:
- Rent clubbed with husband (Section 64(1)(iv))
- Tax: ₹1L × 30% = ₹30,000!
Example 2: Child's Talent Income
10-year-old wins ₹2 lakh in painting competition:
- NOT clubbed (talent)
- Child's separate return
- Tax: Nil (below ₹2.5L)
3: Multiple Children
Father has 3 minor children with FD interest:
- Child 1: ₹10,000
- Child 2: ₹8,000
- Child 3: ₹5,000
- Total: ₹23,000
- Exemption: ₹1,500 × 2 = ₹3,000 (max 2 children!)
- Clubbed: ₹20,000
How to Avoid Clubbing
✅ Transfer asset itself (not just income) ✅ Give adequate consideration when transferring to spouse ✅ Transfer before marriage (not clubbed) ✅ Child's earned income (manual work/talent) not clubbed ✅ Interest on interest from spouse's asset not clubbed
❌ Transfer only income ❌ Gift to spouse from your income ❌ Transfer to minor child (other than talent)
Special Case - Income of Association/Family
HUF (Hindu Undivided Family):
- HUF earns income
- HUF pays tax as separate entity
- Members receive share → Exempt (already taxed at HUF level!)
Deceased Person Example with Calculation
Mr. Verma died on Dec 15, 2023:
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Return filed by: Son (legal heir) Tax paid from: Estate/savings of Mr. Verma
Summary
- Incidence of tax: Determines who pays tax on income (generally - earner pays)
- Clubbing (Sections 60-64): Anti-avoidance to prevent income shifting to escape tax
- Minor's income: Clubbed with parent (higher earner), exemption ₹1,500/child (max 2), talent income exempt
- Spouse's income: From gifted asset clubbed with donor spouse
- Section 60: Income transfer without asset clubbed with transferor
- Representative assessee: Guardian/executor pays for minor/deceased/NRI
- Avoid clubbing: Transfer asset (not income), adequate consideration, pre-marriage transfer, child's talent
- HUF member's share: Exempt (already taxed at HUF level)
Quiz Time! 🎯
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