Key Rule:
- Section 61 (taxation of revocable transfers) does NOT applyif the transfer is irrevocable for a specified period (as defined under Section 62).
- In such cases, income is taxable in the transferee’s hands, not the transferor’s.
Conditions for Section 62 to Apply (Irrevocable Transfer)
For a transfer to be considered irrevocable and escape clubbing under Section 61, it must meet one of these conditions:
- Irrevocable for a Minimum Period (6+ Years)
- The transfer cannot be revoked for at least 6 years(e.g., a 7-year trust).
- Irrevocable for the Transferee’s Lifetime
- The transfer is irrevocable until the transferee’s death(e.g., a lifetime gift).
Exception:
- If the transfer is revocable before the specified period ends, Section 61 will apply, and income will be clubbed back to the transferor.
Examples of Irrevocable Transfers (Section 62)
✅ Case 1: Fixed-Term Irrevocable Trust
- A transfers property to a trust for 10 yearswith no power to revoke.
- Tax Effect:Rental income is taxed in the trust’s hands (not Mr. A’s).
✅ Case 2: Lifetime Gift to Spouse
- B gifts shares to her husband absolutely(no take-back clause).
- Tax Effect:Dividends are taxed in the husband’s hands (unless other clubbing rules apply).
❌ Case 3: Revocable Before Specified Period
- C transfers an FD to his son for 8 years but can revoke after 5 years.
- Tax Effect:Interest income will be clubbed in Mr. C’s hands (since it’s revocable before 6 years).
Comparison: Section 61 (Revocable) vs. Section 62 (Irrevocable)
| ASPECT | SECTION 61 (REVOCABLE TRANSFER) | SECTION 62 (IRREVOCABLE TRANSFER) |
| Can the transferor reclaim the asset? | ✅ Yes | ❌ No (for specified period) |
| Income taxed in | Transferor’s hands | Transferee’s hands |
| Minimum Lock-in Period | Not applicable | 6+ years or transferee’s lifetime |
| Example | – Revocable trust – Gift with take-back clause |
– 10-year trust – Absolute gift |
Key Points :
✔ Section 61 does NOT apply if the transfer is irrevocable for ≥6 years or the transferee’s lifetime.
✔ Income from irrevocable transfers is taxed in the transferee’s hands.
✔ If revoked early, clubbing applies retrospectively.
Tax Planning Tip:
- To avoid clubbing, ensure transfers are completely irrevocable(no take-back clauses).
- Use trusts with fixed lock-in periods(6+ years) to shift income legally.
