One should keep a track of income earned under heads that are tax exempt. One should also be careful of transferring assets to others as it may lead to clubbing of income.
There are different ways in which an individual can ensure that certain income is not taxable in their hands. It is important to look at the manner in which this happens so that any unpleasant surprises are avoided. There are a couple of ways in which income would not be considered for the purpose of taxation and hence one has to look at how this is actually witnessed so that there is a proper understanding present. This would allow the right income to be shown or excluded from the tax calculations. Here is a closer look at the entire issue and what an individual can do about it.
Tax exempt income
There are certain incomes that are exempt from tax. The meaning of the term exempt in tax parlance is that the income does not have to be considered for the purpose of the calculation of the total taxable income on which the tax has to be paid. This would lead to the exclusion of the income that is exempt from the total taxable income. This requires that the individual look at the various heads of income and the source from which this has arisen. This would need to be separated because each of the taxable heads would come under one area while the exempt heads would be grouped elsewhere and then these would be excluded from the figure on which the tax would be calculated.
There are several heads which are exempt and hence it is likely that several of these could appear in the list of income for an individual. For example dividend received from companies and mutual funds are exempt so the total amount received under this head would not have to be included in the taxable income. At the same time even interest received on tax free bonds are exempt so this would have to be excluded. The individual thus has to ensure that they are classifying the income appropriately especially when it comes to the exempt list as this will enable them to take the benefit of the zero rate of tax that would be applicable on it.
Clubbing of income
Most people worry about the fact that there could be some areas where the income that is actually earned by someone else is included in their calculations. This is known as clubbing of income and this can happen for example when say an amount is gifted to the spouse and this in turn is invested and it earns some income or it could be an asset that is transferred to the spouse which earns some income in turn. There is an element of worry when it comes to such clubbing because it could result in a lot of planning actually turning on its head and there could be a risk that the individual could end up paying a higher amount as tax.
However it is also important to look at the reverse situation wherein the income of a person can be reduced because it is clubbed with someone else. This can happen to a minor child where any amount that is earned in excess of Rs 1,500 and which is not due to the skill and talent of the minor would be added to the income of the parent. Similar situation could arise when there is some asset that is transferred to an individual but it falls under the clubbing provisions. Thus it becomes vital that for every person it is seen whether there is some clubbing of income which can actually reduce their taxable income because it has to be considered as someone else’s income.