As the term suggests, clubbing of income means adding or including the income of another person (mostly family members) to one’s own income. This is allowed under Section 64 of the IT Act. However, certain restrictions pertaining to specified person(s) and specified scenarios are mandated to discourage this practice.
Clubbing of income is done to ensure taxpayers do not avoid paying their tax liabilities through moving of incomes of assets within the family. In general, a taxpayer is required to pay on his own income only but the tax department provides certain circumstances where the incomes in a family may be clubbed together and levied tax on.
What is Clubbing of Income?
The clubbing of income simply adds someone else’s income to your own. It is usually for taxation purposes. The provisions of clubbing of income are present in Section 64 of the Income Tax Act.
- The clubbing of income means adding money earned by a different person to one’s own.
- It is usually done among close family members or relatives. But, it is possible for anyone if the rules are applicable.
- The clubbing of income in taxation law doesn’t simply allow adding and showing anyone’s income. It must follow the rules and be relevant.
- One cannot send the money they’ve earned to anyone and claim that it’s not their income. It will only lead to miscalculations in tax liability.
Example
It’ll be easier to explain clubbing of income and define clubbing of income with an example. The clubbing of income of spouse and clubbing of minor income is applicable.
For example, A has a business, and he owns the same. A has hired his wife as the manager in one of the units. However, she lacks knowledge or experience handling managerial tasks and a particular unit. It means that the income is not justified for the wife. She has a monthly salary of ₹70,000. In this case, their incomes can be added to the clubbing of income problems. A can show the income of the wife as his own. It will help make the return process easier for clubbing income tax provisions. Several other rules are present and necessary before this clubbing of income section process.
Reason for Clubbing Income
Many taxpayers in India have attempted to reduce their income tax liability by transferring their incomes and assets to their family members, in such a way that most of the income falls under the taxable amount. The clubbing of income regulations ensures that such practices are curbed.
Specified Scenarios to Club Income
Section | Specified person | Specified scenario | Income to be clubbed |
Section 60 | Any person | Transferring income without transferring asset either by way of an agreement or any other way, | Any income from such asset will be clubbed in the hands of the tranferor |
Section 61 | Any person | Transferring asset on the condition that it can be revoked | Any income from such asset will be clubbed in the hands of the transferor |
Section 64(1A) | Minor child | Any income arising or accruing to your minor child where child includes both step child and adopted child. The clubbing provisions apply even to minor married daughter. | Income will be clubbed in the hands of higher earning parent. Note: If the marriage of the child’s parents does not subsist, income shall be clubbed in the income of that parent who maintains the minor child in the previous year. If a minor child’s income is clubbed in the hands of parent, then an exemption of Rs. 1,500 is allowed to the parent (This is applicable only if the parent opts for the old tax regime). Exceptions to clubbing Income of a disabled child (disability of the nature specified in section 80U) Income earned by manual work done by the child or by activity involving the application of his skill and talent or specialised knowledge and experience Income earned by a major child. This would also include income earned from investments made out of money gifted to the adult child. Also, money gifted to an adult child is exempt from gift tax under gifts to ‘relative’. |
Section 64(1)(ii) | Spouse** | If your spouse receives any remuneration irrespective of its nomenclature, such as Salary, commission, fees or any other form and by any mode, i.e., cash or in kind from any concern in which you have substantial interest* | Income shall be clubbed in the hands of the taxpayer or spouse, whose income is greater (before clubbing). An exception to clubbing: Clubbing is not allowable if spouse possesses technical or professional qualifications in relation to any income arising to the spouse, and such income is solely attributable to the application of his/her technical or professional knowledge and experience. |
Section 64(1)(iv) | Spouse** | Direct or indirect transfer of assets to your spouse by you for inadequate consideration | Income from out of such asset is clubbed in the hands of the transferor. Provided the asset is other than the house property. Exceptions to clubbing of income in the following cases: a. Where the asset is received as part of divorce settlement b. If assets are transferred before marriage, c. No husband and wife relationship subsists on the date of accrual of income. d. The asset is acquired by the spouse out of pin money (i.e. an allowance given to the wife by her husband for her personal and usual household expenses) |
64(1)(vi) | Daughter-in-law | Transfer of assets transferred 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 |
64(1)(vii) | Any person or association of person | Transferring any assets directly or directly for an inadequate consideration to any person or association of persons to benefit your daughter in-law either immediately or on deferred basis | Income from such assets will be considered as your income and clubbed in your hands
|
64(1)(viii) | Any person or association of person | Transferring any assets directly or directly for an inadequate consideration to any person or association of persons to benefit your spouse either immediately or on deferred basis | Income from such assets will be considered as your income and clubbed in your hands |
Section 64(2) | Hindu Undivided Family | In case, a member of HUF transfers his individual property to HUF for inadequate consideration or converts such property into HUF property | Income from such converted property shall be clubbed in the hands of individual |
*An individual is said to have the substantial interest in the concern if–
- In case of a company, individual either by himself or along with his relative/s beneficially owns shares having 20% or more voting power (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits)
- In any other case, such individual either alone or along with his relative/s is entitled to 20% or more of profits in the aggregate of such concern at any time during the previous year.
Clubbing of Income Rules
Transfer of income without transfer of asset
When a person retaining the ownership of an asset but transfers the income from the asset to any of his relatives by an agreement or any other way. – As per Section 64 of the Income Tax Act, such income will be taxable in the hands of the transferor. The following explanation illustrates the concept of income transfer: Assume that person “A” owns 10000, 50% debentures of XYZ private limited of Rs. 500 each. But he is transferring the interest income to his family member “B” without transferring the ownership of Debentures. In this case, although interest will be received by a family member, it is taxable in the hands of “A”.
Revocable transfer of asset
If an asset is transferred under a revocable transfer, income from such asset is taxable in the hands of the transferor. For example, if a person “M” transfers his house to one of his friend N. And, M has right to revoke the transfer during the lifetime of N, then the income arising from the house property will be taxable in the hands of M.
Clubbing of Spouse Income
Clubbing of spouse income is the most common under Section 64 of the Income Tax Act. The following are some of the major aspects of clubbing of spouse income:
Remuneration to Spouse
A person’s income is to be clubbed with a spouse’s income if any payment is received from the spouse through the following methods:
- Salary or remuneration paid to spouse directly.
- Wage or remuneration or commission paid to spouse from a concern in which the assessee has a substantial interest.
For example, if Mithun has a substantial interest in a Company and his wife Anila is working in the company and she is not in any technical or professional qualification. – In this case, the salary income of Anila will be taxable in the hands of her husband Mithun. The key criteria are the technical or professional qualification of the spouse. Hence, clubbing of income would not be applicable, if the spouse possesses technical or professional qualification and income of the spouse is related with such technical or professional knowledge.
Income from Assets Transferred to Spouse
If an asset is transferred by a Person to his spouse directly or indirectly, any income from such asset will be considered as income of the transferor. However, the transfer must not be in connection with an agreement of divorce settlement or with adequate consideration. For example, if a flat is transferred by Arun to his wife Divya. Rental income on the flat will be considered as income of Arun. However, clubbing of income provisions will not be applicable if the transfer of the asset is made through an agreement of divorce or settlement or to live apart. Income from assets transferred to son’s wife Any income which arrives from the assets transferred directly or indirectly by an individual to his son’s wife, otherwise than for adequate consideration, would be included in the transferor income. Income from assets transferred to benefit the spouse of the transferor Where an individual transfers any assets to any person or association of persons, otherwise than for adequate consideration, the income from such assets would be included in the income of the transferor to the extent of benefit that accrues to the spouse, would be included in the total income of the individual
Income from Minor Child
- Any income of the minor child is to clubbed with the parent whose income is higher. If the natural parent of a minor child parents does not exist, then in such cases, the income of minor would be taxable in the hand of the parent who maintains the minor child in the previous year. Also, the child would include both stepchild and adopted child.
- In case of death of both mother and father, the income earned by the minor cannot be clubbed and hence the minor child is required to file income tax return through his legal guardian.
- It must be noted that income once included in the total income of either of the parents would continue to be included in the hands of the same parent in the subsequent years, unless assessing officer is satisfied that it is necessary to do so, after giving that parent opportunity of being heard.
- Additionally, if a child attains majority during the previous year, then, part of the income earned by the child during his minor period would be clubbed in the hands of the parents.
- The parent with whom the income is clubbed will be allowed an amount of deduction from the total income amounting to Rs.1500 per minor child. Under Section 80U of Income Tax Act, clubbing is not to be done when income arises from manual work or application of his skill or specialized knowledge and experience of the minor child suffering from any disability. Such income which arises to the minor child on account of any manual work done by him. Such income which arises to the minor child on account of any activity involving the application of his skills, talent or specialised knowledge and experience.
- Finally, clubbing of income is applicable if a person transferred an asset without adequate consideration to son’s wife or daughter-in-law. Any income from such an asset would be considered as income of the transferor.
When Child’s Income does not qualify for Clubbing
In the following situations, minor child income will not be clubbed in the hand of the parent:
- Manual work is done by the minor.
- Activity involving the application of his skill, talent or specialized knowledge and experience.
- The child is suffering from any disability specified under section 80U.
Investment in Minors Name
The income of the minor, which is not clubbed in the hands of parents, if invested somewhere and income is earned from such investment, then, in such case, the income so earned from the investment would be clubbed in the hands of the parent. For example, if a child is an artist who has earned an income of INR 50,00,000/-. Since the income is earned by the child on the basis of his own skill, such income will not be clubbed in the hands of his parents. Further, INR 50,00,000/- earned by the child is invested in fixed deposit and interest of INR 50,000/- is earned out of such investment, then, interest income would be clubbed in the hands of the parents whose income is higher.
Income from Self-acquired Property Converted to Joint Property
If self-acquired property of an individual is converted into joint famil property without the adequate consideration, then the income derived by the joint family on account of such property would be included in the total income derived by the joint family on account of such self-acquired property. Where an individual, who is a member of the Hindu Undivided Family (HUF) who,
- Converts, his separate property of the HUF, or
- Throws the property to the common stock of the family, or
- Transfers his individual property to the family,
otherwise than for adequate consideration, then the income from such property would be included in the total income of the individual.
Implication in cases of Subsequent Partition
Where the property converted has been the subject matter of the partition amongst the family members, the income derived from such, converted property is received by the spouse, on a partition would be deemed to arise to the spouse from the assets transferred indirectly by the individual to the spouse and the income from the portion, that is received by the spouse, would be clubbed in the hands of the transferor. Although the income from an asset held by the assessee is transferred to certain specified persons under the clubbing of income provisions and hence is includible in the transferor total income, yet the Act that provides the notice of demand in respect of tax on such income that would also be served upon the person to whom such asset has been transferred. On service of such notice, the transferee would be liable to pay the portion of the tax levied on the transferor that is attributable to the income included.
How to avoid Clubbing of Income?
- Transfer of amount to Parents and Interest earned on such investment : Any amount transferred to your Parents as a Gift will not be taxable in the hands of your Parents and lets say such amount is invested in a Fixed Deposit , Interest on such FD will continue to be taxed in the hands of Parents and clubbing provision will not be applicable
- Gift Received at the time of Marriage : Any gift received during the time of marriage will not be taxable in the hands of the recipient and thus any income arising on such investment will continue to be taxed in the hands of the recipient.
- Investment in PPF : Since interest earned on PPF is exempt income , Even if you invest in PPF in the name of your Spouse or Minor child , Interest will not be taxable. Thus clubbing provision became irrelevant.
FAQs
Who is affected by clubbing of income rules?
Clubbing of income rules generally affect individuals, especially those who attempt to transfer income to their spouse, minor children, or other family members. It can also apply to closely held businesses.
What is the purpose of clubbing of income?
The primary purpose of clubbing of income is to prevent individuals from avoiding taxes by transferring their income to family members or related parties, who may have a lower tax liability or fall under a lower tax bracket.
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