The proposed Income Tax Bill 2025, specifically Section 99(1) (earlier Section 64 of Income tax act,1964), has raised concerns about spousal income clubbing, particularly within family businesses. It’s important to understand that while the removal of the specific “technical skills” exemption is a significant change, the intent is likely not to penalize genuine cases where spouses contribute distinct and valuable skills to the family enterprise.
The Nuance: Focus on Ownership and Control
Section 99(1) focuses on situations where one spouse has a substantial interest in the business that employs the other spouse. This provision primarily targets arrangements where income splitting might be used to reduce tax liability, rather than genuine cases where both spouses actively contribute their expertise.
Genuine Contributions Remain Key:
While the explicit “technical skills” exemption is gone, the underlying principle of recognizing genuine contributions likely remains. If a spouse’s income is demonstrably and primarily derived from their bona fide technical or professional skills, and their role is clearly distinct from the spouse who owns the business, it’s less likely that their income will be arbitrarily clubbed.
Example:
A husband owns a manufacturing business. His wife is a highly skilled engineer who manages a specialized production line. While the technical skills exemption is gone, if her income is clearly tied to her engineering expertise, and her role is distinct from her husband’s ownership responsibilities, it’s less probable that her income would be clubbed simply because he owns the business. The focus will likely be on whether the arrangement is genuinely based on her skills and contributions, not just a mechanism for income splitting.
What You Should Do:
Document Everything: Meticulous records of each spouse’s role, responsibilities, qualifications, and income sources are crucial. Clear job descriptions, employment contracts, and evidence of professional expertise will be vital.
Focus on Arm’s-Length Transactions: Ensure that compensation arrangements are comparable to what would be paid to an unrelated professional in a similar role. This demonstrates the legitimacy of the income.
Consult a Tax Professional: Seeking expert advice is essential to understand how these changes apply to your specific situation and to ensure compliance.
The Bottom Line:
The removal of the specific “technical skills” exemption doesn’t automatically mean that all spousal income in family businesses will be clubbed. The focus remains on preventing tax evasion through artificial income splitting. Genuine cases where both spouses contribute distinct and valuable skills to the business are less likely to be targeted. However, robust documentation and professional guidance are essential to navigate these changes and demonstrate the legitimacy of income arrangements.
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