It’s really not uncommon for us to see people diverting their income or assets to their spouse or relative in the hope of reducing taxation. But guess what? Tax laws already have measures in place to prevent people from avoiding taxation through such means. In fact, people unaware of such provisions are laying the groundwork for tax blunders that would put them in a position to pay huge taxes in the future. The clubbing provisions in the Income Tax Act deal with cases where a person can also be taxed for the income earned by somebody else.
What is Clubbing of Income?
Section 64 of the IT Act lays down various situations and the clubbing provisions applicable. Clubbing basically means someone’s income is included in your total income. For instance, the income of an individual diverted to their spouse will not be taxed in the hands of the spouse but included or clubbed in the individual’s total income and taxed in their hands. Hence you cannot divert your income or assets to another individual to avoid taxation of that income in your hands.
Further, the income of any and every person cannot be clubbed on a random basis while computing the total income of an individual and also, not all income of a specified person can be clubbed. The table below shows the various situations as defined under the tax laws and the respective clubbing provisions:
| Section | Specified person | Specified Scenario | Income to be clubbed |
| Section 60 | Any person | Transferring income without transferring assets either through an agreement or any other way. | Any income from such asset will be clubbed in the hands of the transferor. |
| 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.Child includes both stepchild and an adopted child. The clubbing provisions apply even to minor married daughters. | Income will be clubbed in the hands of the high-earning parent. Note: If the marriage of the child’s parents does not exist, 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 a parent, then an exemption of Rs. 1,500 is allowed to the parent. 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 their skill and talent or specialised knowledge and experience Income earned by a major child. This would also include income from investments made from 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 nomenclatures 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).Exception to clubbing: Clubbing is not applicable if the spouse possesses technical or professional qualifications in relation to any income arising to the spouse. (Such income should be solely attributable to the application of their 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 clubbingNo clubbing of income in the following cases: (a) Where the asset is received as part of a divorce settlement (b) If assets are transferred before marriage (c) No husband and wife relationship exists 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, 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 inadequate consideration to any person or association of persons to benefit your daughter-in-law either immediately or on a 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 inadequate consideration to any person or association of persons to benefit your spouse either immediately or on a 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 the individual. |
*An individual is said to have a substantial interest in the concern if–
- In the case of a company, an 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.
**Income from reinvestment of clubbed income by a spouse is not clubbed in the hands of an individual.
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– Nischay Avichal
