The New Income Tax Bill 2025 (ITB) has introduced crucial reforms in clubbing of income to curb tax avoidance through asset transfers within families. These changes impact spouse income clubbing, minor children’s earnings, and business-linked payments. However, it is important to note that while the bill has been introduced in Parliament, it is still under legislative consideration and has not yet become law.
Disclaimer:
This bill is still under legislative review, and its provisions may be subject to modifications before becoming law. Taxpayers should continue to comply with the existing Income Tax Act, 1961, until official notifications confirm the new rules. Always consult a tax professional for the latest updates before making financial decisions.
What is Clubbing of Income?
Clubbing of income means that in certain cases, income earned by one individual is added to another taxpayer’s income, and the latter must pay taxes on both. This is done to prevent tax evasion through income redistribution within the family.
For example:
- Minor Child’s Income: If a child earns through investments, such income is clubbed with the parent’s taxable income unless it falls under specific exemptions.
- Spouse’s Income from Investments: If an individual invests in their spouse’s name, the earnings from those investments are added to their own taxable income and taxed accordingly.
Current Clubbing Provisions Under the Income Tax Act
Under Sections 60-64 of the Income Tax Act, 1961, clubbing rules apply to various income sources, including:
- Property
- Fixed Deposits
- Shares and Mutual Funds
- Post Office Savings
Clubbing of Spouse’s Income
- If an individual has a significant stake in a business, any salary, commission, or remuneration paid to their spouse is clubbed with their income.
- However, if the spouse has professional or technical qualifications and earns solely based on that expertise, their income remains separate from the taxpayer’s.
What’s Changing Under the New Income Tax Bill 2025?
The Income Tax Bill 2025 (ITB 2025) revises clubbing rules, particularly for spouse income clubbing and professional earnings. However, these changes are subject to legislative approval and may undergo modifications before becoming law.
Key Changes You Should Know
| Provision | Old Rule | New Rule (Proposed in ITB 2025) |
|---|---|---|
| Spouse’s Income from Business | Clubbed with taxpayer’s income unless the spouse had professional qualifications. | Expands definition to include “knowledge and experience” alongside qualifications. |
| Income from Investments in Spouse’s Name | Taxed under the primary taxpayer’s income. | No change—still clubbed. |
| Minor Child’s Income | Clubbed with the parent’s income unless earned through own skills. | No change. |
| Technical/Professional Qualification Clause | Strictly required to avoid clubbing. | Now, practical experience and knowledge are considered valid exemptions. |
Why This Matters for Taxpayers
- Greater Clarity for Business Owners: If a spouse is contributing knowledge and expertise, their earnings may not be clubbed, even if they lack formal qualifications.
- No Change for Passive Income Transfers: Investments made in a spouse’s name will still be taxed under the primary taxpayer’s income—so financial restructuring is essential for tax efficiency.
- Implications for Family-Owned Businesses: Salaries paid to spouses in businesses must demonstrate an active role based on experience or expertise to avoid clubbing.
What Should Taxpayers Do Before March 31, 2025?
While the bill is still under discussion, taxpayers should review their income structure and take necessary steps to avoid unexpected tax burdens.
Steps to Take Immediately
✅ Review Spouse and Minor Child’s Income Sources: Ensure income is structured correctly to avoid unnecessary tax liabilities.
✅ Reassess Business Payments: If paying a salary to a spouse, document their contribution with work records or expertise proof.
✅ Investment Planning: Consider tax-efficient investment strategies where clubbing rules won’t apply.
✅ Consult a Tax Expert: If unsure about spouse earnings or business income taxability, consult a professional before filing returns.
Final Takeaway
The ITB 2025 aims to plug tax loopholes while allowing flexibility where professional expertise is involved. While investment-based income transfers remain taxable, business owners can benefit from the expanded definition of expertise for spouse earnings.
Since this bill is still under legislative review, taxpayers should continue to follow the existing Income Tax Act, 1961, until any official notification confirms the new provisions. Always consult a tax professional for the latest updates before making financial decisions.
