Arnav Pandya

There are a lot of situations when the income arising to the spouse is actually included with the income of the individual. When this happens then there can be a shock for the individual due to the situation and at the same time this can result in a position where the entire planning that has been undertaken goes haywire. It is thus important to know the conditions under which the income of the spouse will not be taxed separately and here are a few conditions when this would be experienced.

Income from an entity with substantial interest
There are times when the spouse of the individual earns salary, commission, fees or some other form of income from an entity where the individual has a substantial interest. In this case the income so earned by the spouse will actually be added to the income of the individual. The amount might have been earned in cash or in kind and both the type of situations would be covered for this inclusion to take place. The term substantial interest refers to a situation where the individual and his relatives control more than twenty per cent of the profits of the concern or in case of a company have more than twenty per cent shareholding in the company.

There is an exception to this situation because there are several cases where the spouse may actually possess technical or professional qualifications.  In such a case if the income that is earned by the spouse is solely attributable to the application of the technical and professional qualifications and knowledge and experience then the addition to the income of the individual will not take place. This shows that where there are conditions where the spouse is earning the income due to the possession of sound knowledge then the situation would change.

Assets transferred
There are times when the individual has transferred assets to the spouse without any adequate consideration or under a condition to live apart.  In such a situation the amount that is earned from such assets would actually be added to the income of the individual. There are times when the individual might not want the income to be seen in their books of accounts so in such a situation they transfer the ownership to their spouse. A very good example of this is a situation where there are several bonds that are in the name of an individual. If the income from the bonds is added to the individual’s income then there would have to be tax paid at the highest applicable rate. In order to avoid such a situation the individual might decide to transfer the asset to the spouse. When this happens the income will then arise to the spouse who would be the owner of the asset.

For tax purposes however the income will still be considered to arise to the individual because the asset was not transferred for adequate consideration and was done with an intention to just avoid taxes.

There can also be a situation where the assets are transferred either directly or indirectly to some other person but the income that arises from such an asset is for the benefit of the spouse. The benefit could be immediate or it could be deferred. In such a situation there would be a position wherein the same rules would apply and the individual would have to ensure that the income that arises in such a situation is actually added to their own income and not someone else. This calls for adequate planning beforehand to ensure that there has been a complete analysis of the possible tax implications of any such transfer.

The author can be contacted at arnavpandya@hotmail.com