Clubbing of Income

Clubbing of income is including the income of any other person in the assessee’s total income. India has a progressive tax system. With the increase in earnings, the tax payable to the government also shoots up. To avoid tax, many people transfer their assets or income in the name of their wife, husband, children, parents, and relatives.

To avoid such tax avoidance practices, the Income Tax Department came up with sections 60 to 64. Moreover, the provisions of clubbing income are only for individuals.

For example, if a husband diverts a part of his income to his wife to reduce the tax burden, the transferred income is added to the husband’s total income. Another example, Mr Ram’s has a total income of three lakhs, including rental income of one lakh and salary income of two lakhs. He transfers the rental income to his daughter without transferring the ownership of the house. Now, while calculating tax, the taxable income for Mr Ram is three lakhs and not two lakhs because of the provisions of clubbing of income.

Section 60- Clubbing of Income for transfer of income without transfer of asset

Section 60 is applicable when:

The taxpayer owns the assets.
The taxpayer has not transferred the ownership of the assets.
Lastly, most importantly, the taxpayer transfers the income from the assets to any other person without transferring the ownership of the assets.

If one satisfies all the above conditions, the income from the assets is taxable in the hands of the transferor.

For instance, Mr Sharma receives ₹20,000 per month as rental income. He transfers the right to receive the rent for the house property to Mr Joshi without transferring the ownership of the house property. In this case, section 60 is applicable, one needs to club rent received in the total income of Mr Sharma.

Section 61- Clubbing of Income for revocable transfer of asset

When a person transfers an asset to another person with a clause to re-acquire the asset or income from such asset either in whole or in parts in future, during the lifetime of the transferee, it is called a Revocable Asset. Such transfer is taxable in the hands of the transferor. (Transferor is the person who transfers the asset, and transferee is the person who receives it).

Section 61 is applicable when:

The transferred asset is a revocable transfer.
Moreover, the transfer includes an agreement or settlement.

For example, Arjun transfers his house property to Monica. There is an agreement that Arjun has the right to revoke the asset during Monica’s lifetime. As per section 61, any income from the house property arising to Monice during the two years gets clubbed in Arjun’s income.

There are a few exceptions to section 61:

When the transfer is by the way of trust, and it is not revocable during the lifetime of the transferee.
Also, when the transfer is before 1/4/1961 and is not revocable for six years or more.

Section 64 (1) (ii)- Clubbing of Income of spouse

Before going into the depth of this section, let’s understand two important terms:

Concern- Any business or professional concern like sole proprietor, partnership firm, company, etc.
Substantial interest- When an individual holds equity shares with not less than 20% voting rights or is entitled to receive not less than 20% profits during the previous year, then the person has a substantial interest in the concern.

Section 64 (1) (ii) is applicable when the following conditions get fulfilled:

The taxpayer has a substantial interest in the concern.
The spouse receives remuneration from the business concern.
The remuneration paid to the spouse is not because of technical or professional knowledge.

If one fulfils all the above conditions, such remuneration gets included in the individual’s income.

For example, Mrs Khan receives 30% profits in a company. Mr Khan (her husband) receives ₹10,000 per month as a salary without professional or technical knowledge. Therefore, the salary of Mr Khan is taxable in the hands of Mrs Khan.

Additionally, when husband and wife both have a substantial interest in the concern and receive remuneration, remuneration of both gets clubbed in the hands of the spouse whose total income excluding the remuneration is higher.

Section 64 (1) (iv)- Clubbing of Income from assets transferred to the spouse

Section 64 (1) (iv) is applicable when one fulfills the following conditions:

The taxpayer is an individual.
The individual has transferred an asset (other than house property) directly or indirectly to the spouse.
Moreover, one transfers assets without adequate consideration.
Additionally, there is no agreement to live apart.

If one satisfies all the above conditions, any income from such asset is the taxpayer’s income, who is the transferor.

For instance, a husband transfers 100 debentures of Reliance Ltd in his wife’s name to avoid taxes without any adequate consideration. But, the income from the debentures gets clubbed in the husband’s total income.

The section is not applicable:

When an individual transfers asset with adequate consideration.
If the transfer of assets takes place before marriage.
Moreover, on the day of accrual of income, the transferee is not the transferor’s spouse.
When an individual transfers asset with an agreement to live apart or divorce.
If an individual acquires property from pin money (allowance that the husband gives to his wife for household expenses).

Section 64 (1) (vi)- Clubbing of Income from asset transferred to son’s wife

When an individual transfers asset to a son’s wife, income from such assets gets included in the transferor’s income. One needs to fulfil the following conditions to make section 64 (1) (vi) applicable:

The taxpayer is an individual.
The individual transfers the asset after 31^st May 1973 to the daughter-in-law.
Moreover, one transfers assets without adequate consideration.

For instance, Mr Shah transfers five lakhs of money to a fixed deposit without any consideration to the bank account of his daughter-in-law on 1^st January 2020. On 31^st March 2021, she receives an interest of ₹15,000. Therefore, the interest income gets clubbed to the total income of Mr Shah.

Section 64 (1) (vii)- Clubbing of Income from asset transferred to a person for the benefit of the spouse

When an individual transfers an asset to a person for the spouse’s benefit, the income is taxable in the hands of the taxpayer, the transferor. One should satisfy the below conditions to make section 64 (1) (vii) applicable:

The taxpayer is an individual.
The individual has transferred the asset to a person or an association of people for the spouse’s benefit.
Additionally, one transfers asset without adequate consideration.

For example, Mr A. transfers 10% debentures worth ₹3,00,000 to Mr B without adequate consideration. But with a condition that the interest on the debentures will be utilized for the benefit of Mrs A. In such a case, the interest income is taxable in the hands of the income of Mr A.

Section 64 (1) (viii)- Clubbing of Income from asset transferred to a person for the benefit of son’s wife

When an individual transfers asset to a person for the daughter-in-law’s benefit, income from such assets is assessable in the hands of taxpayer. One needs to fulfil the following conditions to make section 64 (1) (viii) applicable:

The taxpayer is an individual.
The individual has transferred the asset to a person or an association of people for the son’s wife’s benefit.
Additionally, one transfers assets without adequate consideration.
Lastly, the taxpayer transfers the asset before 31^st May 1973.

Section 64 (1A)- Clubbing of Income of Minor

All income arising or accruing to a minor shall be clubbed with the parent’s income whose total income (excluding the minor’s income) is higher. Once the income gets clubbed in the total income of either of the parents, then it will continue for subsequent years. It will not get clubbed with another parent’s income until the permission of the Assessing Officer.
However, in case of a divorce, the minor’s income is taxable in either of parent’s income. Here, the parent is the one who maintains the child in the previous year.
When both the parents are not alive, the minor’s income is taxable in the hands of any of the relatives (including grandparents), or even in the hands of the minor.
During clubbing of a minor’s income with either of the parents, the parent receives an exemption up to the extent of such income or of ₹1,500 p.a. for each minor, whichever is less.

For instance, Ananya is the minor child of Abhishek and Shreya. In 2021-22, Ananya’s earnings amount to ₹2,500. The income of Shreya was more than Abhishek’s. Hence, Ananya’s income gets clubbed into the total income of Shreya, and it continues for the subsequent years, even if Abhishek’s income becomes higher than Shreya’s.

Exceptions to section 64 (1A):

Income of minor from any manual work.
When the minor earns income on account of any activity involving his skills, talent, or specialized knowledge.
Income of minor suffering from a disability, as mentioned under section 80U.