There is a thin line that specifies when the income transferred to a spouse, minor child or daughter-in-law will come under clubbing of income. Many individuals with higher income opt to transfer some of their assets or income to their family members. However, the tax rules give a little leeway to such route. Under 'clubbing of income', the income of minor child or spouse will be taken as income of the taxpaying individuals as if it is their income. Here are some other rules that will club income of the spouse or other family members with that of an individual.
Without adequate consideration:
Any income generated from assets such as house transferred to the spouse or daughter-in-law will be clubbed with the income of transferor only. The only exception allowed is if the asset is transferred as a part of an agreement to live apart. Any direct or indirect transfer to a third-party without adequate consideration for the benefit of the spouse or daughter-in-law comes under clubbing provisions.
Salary or Commission from Business:
Many individuals make a payment arrangement in the form of salary or commission to spouse so as to reduce business income. However, such income is deemed to be an income of an individual, who has a substantial interest in the given business or profession. However, if such income is generated through application of professional or technical know-how and experience of the spouse, then the clubbing provisions will not apply.
Investment in name of minor child:
Any income arising from investments made in the name of minor children will be clubbed in the hands of parents. If both parents are working then, income from such investments will be added to the income of the parent with higher total income. An exemption of Rs. 1,500 per child is available to the parent. The clubbing provisions will not apply if the child has earned income through his/her own talent or skills or specialized knowledge.