1. Introduction to Clubbing of Income
The Indian Income Tax Act, 1961, has provisions that prevent taxpayers from avoiding tax liability by transferring their income to their spouse, minor child, or any other person. This is known as the clubbing of income provisions, which are specified under sections 60 to 65 of the Income Tax Act.
What is Clubbing of Income?
Clubbing of income refers to the inclusion of income earned by one person in the hands of another person for tax purposes. The purpose of these provisions is to prevent tax evasion by individuals through the transfer of income to their relatives.
Applicability of Clubbing of Income
The clubbing provisions apply in various scenarios, such as:
- Income transferred to a spouse: If an individual transfers his/her income to his/her spouse directly or indirectly, the income will be clubbed with the individual’s income.
- Income of a minor child: If income is earned by a minor child and is directly or indirectly transferred to any person, such as the parent, the income is clubbed with the income of that parent.
- Income of a son’s wife or daughter’s husband: The income earned by a son’s wife or daughter’s husband can be clubbed with the income of the individual.
- Income from assets transferred to a spouse: If an individual transfers an asset to his/her spouse without adequate consideration, the income from such an asset will be clubbed with the income of the transferor.
Exceptions to Clubbing of Income
There are certain exceptions to the clubbing provisions, such as:
- Income from assets transferred under a valid agreement: If an asset is transferred under a valid agreement, and the transferor does not have control over the income from such an asset, the income will not be clubbed.
- Income from assets transferred before marriage or for the benefit of the spouse: If an asset is transferred before marriage or for the benefit of the spouse, the income from such an asset will not be clubbed.
- Income from assets transferred to a minor child for their benefit: If an asset is transferred to a minor child for their benefit, the income from such an asset will not be clubbed.
Consequences of Clubbing of Income
When income is clubbed under these provisions, it is added to the income of the individual who is liable to pay tax. The tax liability is calculated based on the individual’s total income, including the clubbed income. This prevents individuals from transferring their income to lower tax bracket relatives to reduce their tax liability.
2. Section 64: Clubbing of Income of Spouse, Minor Child, etc.
The Indian Income Tax Act, 1961, includes several provisions (Sections 60 to 65) that deal with the clubbing of income of certain relatives, such as the spouse, minor child, etc., with that of the taxpayer. These provisions are designed to prevent tax evasion by individuals who might transfer income to family members in lower tax brackets to reduce their overall tax liability. Each of these sections addresses specific scenarios and relationships, and they are as follows:
Section 60 – Transfer of Income where there is no Transfer of Assets:
This section deals with the transfer of income without transferring the underlying assets. It applies when an individual transfers income to another person without transferring the asset generating that income.
The income arising from such transfers is deemed to be the income of the transferor and is taxable in the hands of the transferor.
Section 61 – Transfer of Income where there is a Revocable Transfer of Assets:
This section pertains to revocable transfers of assets where the transferor retains the right to revoke the transfer.
In such cases, the income generated from the transferred asset is taxed in the hands of the transferor.
Section 62 – Income of Spouse:
Section 62 deals with the clubbing of income of the spouse.
It applies when an individual transfers income-generating assets to their spouse.
The income from such assets is clubbed with the income of the individual who made the transfer and is taxed in their hands.
Section 63 – Income of Minor Child:
This section deals with the clubbing of income of a minor child with that of their parent(s).
Any income earned by a minor child from assets transferred directly or indirectly by the parent(s) is clubbed with the income of the parent(s) and taxed accordingly.
Section 64 – Income of Other Persons to be Included in Assessee’s Income:
Section 64 encompasses a broader category, including not only the spouse and minor child but also any other person.
It applies when income is transferred directly or indirectly to specified relatives for the benefit of the taxpayer’s spouse or minor child.
The income is clubbed with the income of the taxpayer who made the transfer.
Section 65 – Income of Revocable Transfer:
This section deals with revocable transfers of assets, where the transferor has the power to revoke the transfer.
The income generated from such revocable transfers is taxed in the hands of the transferor.
3. When an Individual is Assessable in respect of Remuneration of Spouse [Section 64(1)(ii)]
Section 64(1)(ii) is applicable if the following conditions are satisfied—
Condition 1 : The taxpayer is an individual.
Condition 2 : He/she has a substantial interest in a concern.
Condition 3 : Spouse of the taxpayer (i.e., husband/wife of the taxpayer) is employed in the above-mentioned concern.
Condition 4 : Spouse is employed in the concern without any technical or professional knowledge or experience.
In computing the total income of an individual, there shall be included all such sums as arise directly or indirectly to the spouse, of such individual by way of salary, commission, fees or any other form of remuneration, whether in cash or in kind from a concern in which such individual has a substantial interest.
Therefore, any remuneration derived by a spouse from a concern in which the other spouse has a substantial interest, shall be clubbed in the hands of the spouse who has a substantial interest in that concern. Any other income, not specified above, is outside the scope of this section and will not be clubbed even if it accrues to the spouse from a concern in which the individual has a substantial interest.
No Clubbing if Remuneration is due to Technical or Professional Qualifications:
The provisions of this clause shall not apply to any income arising to the spouse:
(a) on account of technical or professional qualifications possessed by the spouse, and
(b) the income is solely attributable to the application of his/her technical or professional knowledge or experience.
For example, X is a partner in a partnership concern and is entitled to 50% share of the profit of the firm. Mrs. X is employed as the General Manager of the firm and is getting a salary of Rs.25,000 per month. The taxable salary of Mrs. X will be clubbed with the total income of X under the head ‘Income from salaries’.
However, if Mrs. X is receiving the salary on account of her technical or professional knowledge or experience, then the salary would not be clubbed.
Where both Husband and Wife have Substantial Interest and Both are getting Remuneration from the Concern:
If the husband and wife both have substantial interest in the concern and both are in receipt of remuneration from the concern, then the remuneration of both shall be clubbed in the hands of that spouse whose total income, heJbre including such remuneration, is greater. In this case, the clubbing will be done for the first time in the previous year in which the following three conditions are satisfied:
(a) Both the husband and wife have a substantial interest in the concern.
(b) Both the husband and wife get remuneration from such a concern.
(c) The relationship of husband and wife subsists at the time of accrual of such income.
Where such income is once included in the hands of either spouse, any such income arising in any succeeding year shall not be included in the total income of other spouse unless the Assessing Officer is sails! led, after giving that spouse an opportunity of being heard, that it is necessary so to do.
Meaning of Substantial interest
An individual shall be deemed to have a substantial interest in the concern:
| Provision | Illustration |
| 1. Both husband and wife have a substantial interest in a concern | X (and his relatives) holds 20 per cent equity share capital in A Ltd. Mrs. X (and her relatives) holds 20 per cent equity share capital in A Ltd. |
| 2. Both are in receipt of the remuneration from such concern | X and Mrs. X are employed by A Ltd. |
| 3. Remuneration is received without any technical and professional qualification | They are employed in A Ltd. without any technical professional qualification. |
| 4. Remuneration will be included in the total income of husband or wife whose total income, excluding such remuneration, is greater. | Salary income of X and Mrs. X will be included in the income of X (if income of X before this clubbing is higher than that of Mrs. X). |
If once clubbing is done in the hands of X, salary of X and Mrs. X will be included in the income of X (in the subsequent years), even if income of X is lower than that of Mrs. X in that year. In such a case, the Assessing Officer can club the income of X and Mrs. X in the hands of Mrs. X only if the Assessing Officer is satisfied that it is necessary to do so. The Assessing Officer can take such action only after giving Mrs. X an opportunity of being heard.
How to compute Salary. Commission, Fee or any other Remuneration:
For the purpose of clubbing under section 64(1)(ii), salary has to be computed in accordance with the provisions of sections 15 to 17.
Similarly, commission, fee or any other form of remuneration will have to be computed after allowing relevant deductions for computing such income.
4. When an Individual is Assessable in respect of income from Assets Transferred to the Spouse [Section 64(1)(iv)]
Section 64(1)(iv) is applicable if the following conditions should be satisfied—
Condition 1 : The taxpayer is an individual.
Condition 2 : He/she has transferred an asset (other than a house property).
Condition 3 : The asset is transferred to his/her spouse.
Condition 4 : The transfer may be direct or indirect.
Condition 5 : The asset is transferred otherwise than (a) for adequate consideration, or (b) in connection with an agreement to live apart.
Condition 6 : The asset may be held by the transferee-spouse in the same form or in a different form.
If the above conditions are satisfied, any income from such asset shall be deemed to be the income of the taxpayer who has transferred the asset.
In computing the total income of an individual, all such income as arises directly or indirectly, subject to the provisions of section 27(1) (i.e., deemed owner), to the spouse of such individual from assets (other than house property) transferred directly or indirectly to the spouse of such individual otherwise than for adequate consideration or in connection with an agreement to live apart shall be included.
As per this provision, if an individual transfers any asset other than house property to his/her spouse, the income from such an asset shall be included in the total income of the transferor. This provision is not applicable to house property because in that case the transferor is deemed to be the owner of the house property and the annual value of the property is taxed in the hands of the transferor as per section 27.
| Where a house property is transferred by an individual to his or her spouse, although the transferor shall be the deemed owner of the house property and shall be subject to tax under the head ‘income from house property’ but if there is any capital gain on the transfer of such house property, such capital gain shall first be computed in the hands of the transferee and thereafter the same will he clubbed with the income of the transferor as per provisions of this section, i.e., section 64(1)(iv). |
The income from the transferred assets shall not be clubbed in the following cases:
(i) if the transfer is for adequate consideration:
(ii) the transfer is under an agreement to live apart;
(iii) if the relationship of husband and wife does not exist, either at the time of transfer of such asset or at the time of accrual of the income e.g. A makes a gift to his fiancée (would be wife) then the income arising on the amount so gifted, shall not be taxable in the hands of A, even after their marriage as the relationship of husband and wife does not exist at the time of making the gift. Similarly, if A makes a gift to his wife and later on A divorces his wife, income arising after such event will not be clubbed.
Note.—
lf A makes a gift to his fiancée (would be wife), the amount of such gifts if exceeds Rs.50,000 shall be taxable in the hands of the fiancée under the head ‘income from other sources’ as per section 56(2)(x).
- If any property is acquired by the wife out of an allowance given by her husband for her personal expenses (called pin money), the clubbing provisions shall not apply.
- If the asset transferred has changed the shape and identification, then income from such changed asset shall be clubbed. For example, if the asset originally gifted were shares, thereafter the spouse sold the shares, and acquired house property which is later on let out, then such income from house property shall be clubbed.
5. When an Individual is Assessable in respect of Income from Assets Transferred to Son’s Wife [Section 64(1)(vi)]
Section 64(1)(vi) is applicable if one has to satisfy the following conditions—
Condition 1 : The taxpayer is an individual.
Condition 2 : He/she has transferred an asset after May 31, 1973.
Condition 3 : The asset is transferred to his/her son’s wife.
Condition 4 : Transfer may be direct or indirect.
Condition 5 : The asset is transferred otherwise than for adequate consideration.
Condition 6 : The asset may be held by the transferee in the same form or in a different form.
Any income which arises from assets transferred directly or indirectly by an individual to his son’s wife after 1.6.1973, otherwise than for adequate consideration, shall be included in the income of the transferor. For example, R transfers 1,000 10% bonds of Rs.100 each of IDBI to his son’s wife without any consideration. IDBI declares Rs.10,000 as interest. Although the sum of Rs.10,000 as interest is received by his son’s wife, this amount shall be included in the income of R under the head ‘Income from Other Sources’ for the purpose of computing his total income.
6. When an Individual is Assessable in respect of Income from Assets Transferred to a Person for the Benefit of Spouse [Section 64(1)(vii)]
Section 64(1)(vii) is applicable if One has to satisfy the following conditions—
Condition 1 : The taxpayer is an individual.
Condition 2 : He/she has transferred an asset.
Condition 3 : The transfer may be direct or indirect.
Condition 4 : The asset is transferred to a person or an association of persons.
Condition 5 : It is transferred for the immediate or deferred benefit of his/her spouse.
Condition 6 : The transfer is without adequate consideration.
If the aforesaid conditions are satisfied then income from such asset to the extent of such benefit is taxable in the hands of the taxpayer who has transferred the asset.
Where an individual transfers any assets to any person or association of persons, otherwise than for adequate consideration, the income from such assets shall be included in the income of the transferor to the extent to which the income is for the immediate or deferred benefit of his or her spouse. In other words, where an asset is transferred to some other person, without adequate consideration for the benefit of the spouse of the individual as well as for some other persons, income on such an asset to the extent of benefit which accrues to the spouse, shall be included in the total income of the individual. For example, X transfers a house to his friend Y with a direction that 50% of the rental income is to be used for the benefit of his wife Mrs. X and 50% for others, then the rental income to the extent of 50% shall be included in the total income of X.
7. When an Individual is Assessable in respect of Income from Assets Transferred to a Person for the Benefit of Son’s Wife [Section 64(1)(viii)]
Section 64(1)(viii) is applicable if One has to satisfy the following conditions—
Condition 1 : The taxpayer is an individual.
Condition 2 : He/she has transferred an asset after May 31, 1973.
Condition 3 : The asset is transferred to any person or an association of persons.
Condition 4 : Transfer may be direct or indirect.
Condition 5 : The asset is transferred for the immediate or deferred benefit of his/her son’s wife.
Condition 6 : The asset is transferred otherwise than for adequate consideration.
If the above conditions are satisfied, then income from the asset to the extent of such benefit is included in the income of the taxpayer who has transferred the asset.
Where an individual transfers any assets, after I st June, 1973 to any person or association of persons, otherwise than for adequate consideration the income from such assets shall be included in the income of the transferor to the extent to which the income is for the immediate or deferred benefit of his or her son’s wife.
8. When an Individual is Assessable in respect of Income of his Minor Child [Section 64(1A)]
in computing the total income of an individual, there shall be included all such income as arises or accrues to his minor child. Therefore, the income of a minor child is to be clubbed in the hands of either of his parents.
The income shall be clubbed in the hands of that parent whose total income (excluding the income of the minor) is greater. If the marriage of his parents does not subsist, the income shall be clubbed in the hands of that parent who maintains the minor child in the previous year.
Where any income is once included in the total income of either parent, any such income arising in any succeeding year shall not be included in the total income of the other parent, unless the Assessing Officer is satisfied, after giving that parent an opportunity of being heard, that it is necessary so to do.
Where the income of a minor child has been included in the total income of a parent, such parent shall be entitled to an exemption to the extent of such income or Rs.1,500, whichever is less, in respect of each minor child whose income is so included.
Certain incomes of Minor Child Taxable in the hands of Minor Child only:
The following income of a minor shall not be clubbed and will be taxable in the hands of the minor himself:
(i) Any income of a minor child suffering from any disability of the nature specified in section 80U like physically disabled, totally blind, etc.
(ii) Such income which accrues or arises to the minor child on account of any manual work done by him.
(iii) Such income which accrues or arises to the minor child on account of any activity involving application of his skills, talent or specialised knowledge and experience.
| 1. Child in relation to an individual, includes a step child and an adopted child of that individual. [Section [ 2(15B)] -2. Since 64(1 A) does not exclude minor married daughter, even income arising to minor married daughter would be clubbed. However, where section 27 applies, clubbing of income from property gifted by the parent does not arise.3. If both the parents of the minor child are not alive then the income of minor child cannot be clubbed and the guardian of the minor child shall file the return of such income on behalf of the minor. It may be added that it will not be included in the income of guardian, if the guardian is not a parent. 4. Where the minor child attains majority during the previous year, then, the income till the date he remained minor in that previous year shall be clubbed in the hands of the parent. |
Tax Implication of Income from Self-acquired Property Converted to Joint Family Property and Subsequent Partition [Section 64(2)]
Where an individual, who is a member of the Hindu Undivided Family,—
(a) converts, his separate property as the property of the HUF, or
(b) throws the property into the common stock of the family, or
(c) otherwise transfers his individual property to the family,
otherwise than for adequate consideration, then the income from such property shall continue to be included in the total income of the individual.
In other words, if self-acquired property of an individual is treated/converted into joint family property without adequate consideration, the income derived by the joint family on account of such property shall be included in the total income of the individual who was the owner of such self- acquired property. For example, X owns a house property from which he derives an income of Rs.6,00,000 per annum. If, he converts this property as the property of an HUF of which he is a member. Although the income shall henceforth be received by the HIJF but it shall be deemed to be the individual income of X and shall be included in computation of his total income under the head ‘Income from House Property’
Implication in the case of Subsequent Partition:
Where the converted property has been the subject-matter of partition (whether partial or total) amongst the members of the family, the income derived from such converted property as is received by the spouse, on partition, shall be deemed to arise to the spouse from assets transferred indirectly by the individual to the spouse and the income from the portion, received by the spouse, shall be clubbed in the hands of the transferor. In the example given above, if there is partition in the family and there are five members entitled to a share in the HUF property, i.e., X, Mrs. X, a minor child of X and two major sons of X assuming they decide to share the property equally then the income from the property shall be treated as follows:
(a) Income from 1/5th share of X Rs.1,20,000;
(b) Income from 1/5th share of Mrs. X Rs.1,20,000 (to be clubbed with the income of X);
(c) Income from 1/5th share of minor child of X Rs.1,20,000 (to be clubbed with the income of X or Mrs. X, whose income is higher, under Section 64(1A). However, X can claim exemption upto Rs.1,500 under Section 10(32);
(d) Income from 2/5th share of other members shall be taxable in the hands of the major sons individually.
| IMPORTANT NOTES :
1. Income is to be Clubbed but income on income is not to be Clubbed: It may be observed that under all the provisions discussed above, what is to be clubbed is the income arising from the assets transferred. However, the income derived on the accretion of such property or from the accumulated income from such property cannot be clubbed. For example, X transfers 10,000 bonds of IDBI to his wife Mrs. X. Mrs. X receives interest of Rs.70,000 per annum on the bonds. This amount of Rs.70,000 is to be clubbed in the hands of Mr. X. However, if Mrs. X accumulates Rs.50,000 out of the interest income and deposits it with the company at an interest of 10% per annum then the interest of Rs.5,000 per annum received by her on the deposit will not be clubbed in the income of Mr. X. 2. Income includes Loss. For the purpose of section 64, income includes loss. Therefore, under all the provisions discussed above, where the income arising to one person is to be clubbed in the hands of another person, in the event of loss, the loss shall be taken into account in computing the income of such person. |
9. Under which head of Income will the Clubbed Income be Assessed
As per the provisions discussed above, income of another person is to be included in the total income of the individual. However, such an income will first be computed in the hands of the recipient as if it were his income and such recipient will compute this income under the relevant head after claiming exemptions/allowances! deductions permissible under the relevant head in which it falls. Such income computed, under the relevant head, will be included in the total income of the individual under the same head of income.
10. Assessment of Clubbed Income
Under the Indian Income Tax Act,1961, the Clubbed Income is assessed under the head “Income from Other Sources”. This head of income includes income that does not fall under any other specific head of income and is taxable as per the provisions of the act.
When it comes to clubbed income, there are specific situations where it applies. These situations are defined under Section 60 to Section 64 of the Indian Income Tax Act,1961. Let’s take a closer look at these situations:
1. Transfer of Income without Transfer of Assets (Section 60)
Under this section, if an individual transfers their income to someone else without transferring the underlying assets, the income will be clubbed with the transferor’s income. This provision prevents individuals from transferring their income to avoid tax liabilities.
2. Revocable Transfer of Assets (Section 61)
If an individual transfers assets to someone else, but the transfer is revocable, the income arising from those assets will be clubbed with the transferor’s income. This provision prevents individuals from transferring assets temporarily to avoid tax on the income generated from those assets.
3. Transfer of Assets for the Benefit of Spouse (Section 64)
Under this section, if an individual transfers assets to their spouse directly or indirectly, and the main purpose of the transfer is to benefit the spouse, the income arising from those assets will be clubbed with the transferor’s income. This provision prevents individuals from transferring assets to their spouse to reduce their tax liability.
It is important to note that clubbed income is taxed at the applicable tax rates for the transferor. The income is added to the transferor’s total income and taxed accordingly. The purpose of clubbing income is to ensure that the income is taxed in the hands of the person who actually earns it.