Introduction- What is clubbing of income?
Clubbing of income is a concept under the Income Tax Act, 1961 (hereinafter referred to as the “Act”). Clubbing of income means the inclusion of the income of one person in the total income of another person. This aspect is governed by Section 64 of the Act, and it ensures that such clubbing does not result in tax evasion. I.e., a person may transfer their income to another person, usually a family member, who has a lower tax liability or is exempt from tax, to reduce their tax liability. Clubbing of income provisions is applicable in cases where the income is transferred directly or indirectly from one person to another.
Provisions of Clubbing of Income
The provisions for clubbing of income are applicable to the following types of income:
- Income from house property,
- Income from assets transferred without consideration,
- Income from gifts,
- Income from investments made in the name of minors, and
- Income from assets transferred to spouse or daughter-in-law.
In all the above cases, the income of the transferor is clubbed in the income of the transferee for taxation purposes.
Clubbing of Income of Spouse
Let us take an example to understand this better. Mr. X, who has a high taxable income, transfers property to his wife, Mrs. Y, without receiving any consideration. The income generated from this property is now considered Mrs. Y’s income, and she is liable to pay tax on it. However, since the property was transferred without any consideration, the income generated from it is deemed to be Mr. X’s income and will be included in his total income for taxation purposes.
Therefore, Mr. X is required to pay tax on the income generated from the property, even though it is in his wife’s name.
Clubbing of Income of Minor
The provisions of clubbing of income shall also apply to investments made by parents on behalf of minors. If an investment is made in the name of a minor child, then the income earned from that investment will be clubbed into the income of the parent who has made the investment. Hence, the purpose of clubbing income is to prevent parents from evading tax by investing on behalf of minor children.
Clubbing of Income from gifts
Furthermore, the provisions of clubbing of income also cover income from gifts. If the income generated from a gift received from another person is taxable, then the said income should be taxable in the hands of the person who has given the gift.
Exceptions: -It is important to note that the provisions of clubbing of income do not apply to gifts received from the following relatives: –
- Spouse
- Parents
- Siblings, and
- Children.
Therefore, the income generated from such gifts is not included in the income of the recipient.
Who are eligible for clubbing their income under the Income Tax Act, 1961?
Not every person can club their income with that of another while calculating the Total Income of an individual. Refer scenarios mentioned below for clubbing the income of an individual with another:
| Provision | Person | Transaction | Income (that can be clubbed) |
| Section 60 | Anyone | When income is transferred without the transfer of assets | Thus, any income generated from such asset shall be taxable in the hands of the Transferor |
| Section 61 | Anyone | When assets are transferred in a manner that allows for revocation of assets. | Thus, any income generated from such asset shall be Taxable in the hands of the transferor |
| Section 64 (1)(ii) | Spouse of the individual
|
When Income* of the spouse from a concern in which the individual has a substantial interest** | Income taxable in the hands of the individual |
| When Income* of spouse and individual from a concern in which both have a substantial interest** | Income taxable in the hands of the individual or spouse, whoever has a greater Total Income | ||
| Section 64 (1)(vi) | Daughter-in-law | When there’s a Transfer of assets directly or indirectly to your daughter-in-law by you for inadequate consideration | Any income from such assets transferred is clubbed in the hands of the transferor |
| Section 64(1)(vii) | Any person or AOP | When there’s a Transfer of assets directly with or without adequate consideration for benefit of the spouse of the transferor | Any income from such asset shall be taxable in the hands of the transferor |
| Section 64(1)(viii) | Any person or AOP | When there’s a Transfer of assets directly with or without adequate consideration for benefit of the daughter-in-law of the transferor | Any income from such asset shall be taxable in the hands of the transferor |
| Section 64(1A) | Minor | Income arising or accruing to a minor child of an individual | Income is taxable in the hands of parents with higher earnings. Exceptions: Check below the table. |
| Section 64(2) | HUF | Transfer or conversion of individual’s property to HUF property for inadequate consideration | Income from such property taxable in the hands of the individual |
*Income-
Income shall include any sum (whether arising directly or indirectly) in the form of salary, commission, fees, or any other remuneration.
Also note: Any income generated from reinvestment of clubbed income by a spouse is not taxable in the hands of the individual.
**Substantial Interest-
- In case such concern is a company: The individual alone, or with his relatives, at any time during the previous year, has held equity shares in such company, carrying at least 20% voting rights of the company.
- In other cases: The individual alone, or with his relatives is entitled to a minimum of 20% profits from such a concern.
Exceptions to taxability on clubbing of income of minor child:
- If the parents of the minor child are no longer together, the parent who is maintaining the child shall club their income with the income of the minor.
- A parent can claim an exemption of Rs. 1500, on combining the income of their minor child
- Parents cannot club their income with the income of a disabled child (as per the definition of ‘disability’ under section 80U of the Act).
- Income earned by minors from manual labor, skills, knowledge, or experience is also exempt under the clubbing provisions.
- Parents cannot club their income with the income earned directly by the major child or derived from such a child’s income.
For more details refer to our blog on “Clubbing of income of minor child”
An Example – Clubbing of Income
For example, an individual Mr. X has an income of Rs 30,00,000, out of which Rs. 8,00,000 is the rent that he receives from a house property he has put up for lease. However, his wife has registered such property in her name.
Now, when calculating the taxable income of Mr. X, we shall deduct Rs. 8,00,000 from his income and add it to the income of Mrs. X. This is so because such income is attributable to the property owned by Mrs. X. Therefore, as per the provisions of clubbing of income, Mrs. X’s income cannot be clubbed with the income of Mr. X.
Conclusion: –
The provisions of clubbing of income under the Income Tax Act, 1961 aim to prevent tax evasion by individuals who transfer income to family members or other persons with lower tax liabilities. These provisions are applicable to various types of income, including income from house property, income from assets transferred without consideration, income from gifts, income from investments made in the name of minors, and income from assets transferred to a spouse or son’s wife. Therefore, it is important for taxpayers to be aware of these provisions and comply with them to avoid any legal issues or penalties.
Furthermore, you can read about some of the important concepts of ‘Clubbing of Income’ in our below-mentioned articles
