The general rule of Taxation is that, you only have to pay tax on the income you earn. What happens if your income gets clubbed is quite the opposite, you have to pay tax on the income other people have earned.
In your case, if your wife's income were to be clubbed in your hands, all her income would be added to your total income.
This would increase your income, thereby attracting tax at the higher rate, and you would have to pay more tax. Let me explain.
Let's say your income is Rs. 4.50 lakhs and your wife's income is Rs. 2 lakhs.
If your wife were to pay her own tax, it is evident that there is no need to pay tax as the income is below the basic exemption limit of Rs. 2.50 lakhs.
As regards your income, Your earlier tax liability would only be 5% since your income is less than 5 lakhs, and your tax liability would be Rs. 10,000. No problemo
If, however, her income were clubbed in your hands, your total income would increase to Rs. 6.50 lakhs. You would pay 5% tax upto 5 lakhs, but for above 5 lakhs, the rate is exponentially increased to 20% for above 5 lakhs.
As a result, your tax liability is increased to (250000*0% + 250000*5% +150000*20%) which comes to Rs 42,500 worth of tax liability.
This excess tax of Rs. 32,500, which was not required to be paid by your wife if she could file her own returns, is the consequence of having your wife's income clubbed in your hands.
