Prevent tax evasion through the diversion of income to family members "clubbing of income" in Clause 99 of the Income Tax Bill, 2025 vs. Section 64 of the Income Tax Act, 1961

Clause 99 Income of individual to include income of spouse, minor child, etc.

Income Tax Bill, 2025

Introduction

The Clause 99 of the Income Tax Bill, 2025, introduces, which aims to regulate the inclusion of income from other persons, such as spouses and minor children, into the total income of the assessee. This clause essentially extends the concept of 'clubbing of income,' which is already present in Section 64 of the Income Tax Act, 1961. Understanding and analyzing these provisions is crucial, as they have significant implications for taxpayers, particularly those with substantial family wealth or business interests.

Objective and Purpose

The primary objective of Clause 99 in the Income Tax Bill, 2025, is to prevent tax evasion through the diversion of income to family members in lower tax brackets. By including the income of spouses, minor children, and other specified individuals in the total income of the assessee, the provision seeks to ensure a fair and equitable tax system. This legislative intent mirrors that of Section 64 of the Income Tax Act, 1961, which was designed to curb tax avoidance strategies that exploit familial relationships.

Detailed Analysis

Clause 99 of the Income Tax Bill, 2025 and Section 64 of the Income Tax Act, 1961

Clause 99 is structured to address various scenarios where income can be clubbed into an individual's total income. Each sub-clause targets specific relationships and types of income, ensuring comprehensive coverage.

1. Income from Spouse: - Clause 99(1)(a) stipulates that income arising to the spouse through salary, commission, or other forms of remuneration from a concern where the individual has a substantial interest will be included in the individual's total income. However, income derived solely from the spouse's technical or professional qualifications is excluded. This mirrors Section 64(1)(ii) of the 1961 Act, maintaining consistency in recognizing professional autonomy.

2. Income from Assets Transferred to Spouse: - Clause 99(1)(a)(ii) addresses income from assets transferred to the spouse without adequate consideration. This provision aligns with Section 64(1)(iv) of the 1961 Act, emphasizing the need to include such income in the individual's total income to prevent tax avoidance through asset transfers.

3. Income from Assets Transferred to Son's Wife: - Clause 99(1)(b) includes income from assets transferred to the son's wife, reflecting the provisions of Section 64(1)(vi) of the 1961 Act. This ensures that indirect transfers intended to benefit the son's wife are also captured under the clubbing provisions.

4. Income of Minor Child: - Clause 99(1)(c) includes the income of a minor child, except where the income arises from manual work or the application of the child's skill or talent. This is consistent with Section 64(1A) of the 1961 Act, which similarly excludes income from the child's personal efforts.

5. Investment of Transferred Assets: - Clause 99(2) provides a formula to calculate the income to be included when transferred assets are invested in a business or partnership. This is similar to Explanation 3 of Section 64, ensuring that income from such investments is appropriately attributed to the individual.

6. Conversion of Property to HUF: - Clause 99(3) addresses the conversion of individual property to Hindu Undivided Family (HUF) property, deeming the income from such property as the individual's income. This aligns with Section 64(2) of the 1961 Act, ensuring continuity in handling property conversions.

Practical Implications

The practical implications of Clause 99 are significant for taxpayers with complex family and business arrangements. Taxpayers must be vigilant in understanding how income from family members is treated under this provision to ensure compliance and avoid unintended tax liabilities. The inclusion of income from spouses and minor children necessitates careful financial planning and transparency in asset transfers.

Comparative Analysis

The comparison between Clause 99 of the Income Tax Bill, 2025 and Section 64 of the Income Tax Act, 1961, reveals a strong alignment in their objectives and provisions. Both aim to prevent tax avoidance through income diversion and asset transfers within families. However, the 2025 Bill introduces a more structured approach, particularly in calculating income from investments of transferred assets, which may enhance clarity and compliance.

1. Substantial Interest: - Both provisions define substantial interest similarly, ensuring consistency in determining when income from a spouse's employment should be included in the individual's total income.

2. Technical and Professional Income: - The exclusion of income solely attributable to professional qualifications is a common feature, highlighting the respect for individual professional earnings.

3. Asset Transfers: - Both laws address asset transfers to spouses and the son's wife, ensuring that such transfers for tax avoidance are captured and taxed appropriately.

4. Income of Minor Children: - The provisions for including a minor child's income are consistent, with exceptions for income from the child's personal efforts.

Conclusion

Clause 99 of the Income Tax Bill, 2025, and Section 64 of the Income Tax Act, 1961, are pivotal in ensuring that the tax system remains equitable by addressing potential loopholes in income diversion within families. While the 2025 Bill builds on the foundation laid by the 1961 Act, it introduces refinements that may enhance clarity and compliance. Taxpayers must remain informed and proactive in understanding these provisions to manage their tax liabilities effectively.

Full Text:

Clause 99 Income of individual to include income of spouse, minor child, etc.

Dated: 3-4-2025