Clubbing of Income Explained: Key Tax Rules & FAQs for Smart Financial Planning in 2025

Clubbing of Income Explained: Key Tax Rules & FAQs for Smart Financial Planning in 2025 

While income tax laws expect to place a taxpayer under fair taxation terms, sometimes taxpayers charge or attempt to divide income with family members to decrease their tax burden. To regulate such types of activities, the Income Tax Act was constituted, which consists of provisions regarding clubbing of incomes under Sections 60 to 64. These provisions also restrict the evasion of tax by clubbing income- the incomes earned from certain persons by spouses or minor children relative to the income of that person.

It is essential to comprehend the provisions of clubbing of income for good financial planning in the year 2025. These cover crucial tax rules, types of real-life situations, as well as FAQs that help taxpayers conform while prudently maximizing tax efficiency.

What is clubbing of income?

Typically, an individual is taxed only on the income they personally earn. However, in certain cases, the income of another person is included (or "clubbed") in the taxpayer's taxable income, making them liable for tax on both their own earnings and the clubbed income. This scenario is referred to as clubbing of income.

For example, the income of a minor child is added to the income of their parent. The provisions related to clubbing of income are covered under Sections 60 to 64 of the Income Tax Act.

 

Does clubbing apply when income is transferred without transferring the underlying asset?

Yes. According to Section 60, if a person transfers income from an asset they own but retains ownership of the asset itself, the income will still be taxed in the hands of the transferor.

Example:

Mr. Raj owns a bungalow that he has rented out for an annual rent of ₹94,000. He transfers the rental income to his friend Mr. Kumar without transferring ownership of the bungalow. In this case, the ₹94,000 rent will still be taxed as Mr. Raj's income.

 

Is clubbing applicable in the case of a revocable transfer?

Yes. A revocable transfer occurs when the transferor retains direct or indirect control over the asset or the income it generates.

Under Section 61, if a transfer is considered revocable, any income from the transferred asset will still be taxed in the hands of the transferor. However, this provision does not apply if:

1. The transfer is in the form of an irrevocable trust for the lifetime of the beneficiary.
2. The transfer is irrevocable during the transferee’s lifetime.

 

Can a spouse’s salary be clubbed with an individual’s income?

In certain cases, yes. Section 64(1)(ii) states that if a spouse earns a salary from a business or company where the other spouse has a substantial interest, the salary will be clubbed with the income of the spouse who holds the interest—provided the earning spouse does not have professional or technical expertise justifying the remuneration.

Key conditions:

• The individual must have a substantial interest in the company (holding at least 20% equity shares or 20% of the profits).
• The spouse must be employed by the company where the individual has substantial interest.
• The spouse’s salary must not be justifiable based on professional knowledge or experience.

Example 1:

Mr. Raja owns 21% equity in Essem Minerals Pvt. Ltd. His wife, Mrs. Raja, works as an Accounts Manager there, earning ₹84,000 per month. However, she has no relevant experience or qualification in accounting. Since her salary is not justified by professional expertise, it will be clubbed with Mr. Raja’s income and taxed accordingly.

Example 2:

Mrs. Kumar owns 25% equity in SM Construction Pvt. Ltd. Her husband, Mr. Kumar, is an architect employed as a site observer, earning ₹28,400 per month. Since his salary is justified by his professional qualifications, it will not be clubbed with Mrs. Kumar’s income and will be taxed separately.

 

Will income from assets gifted to a spouse be clubbed?

Yes. Under Section 64(1)(iv), if an individual gifts an asset (other than residential property) to their spouse without adequate consideration, any income derived from that asset will be clubbed with the donor’s income.

Example 1:

Mr. Soham owns 9,400 debentures of Shyamal Minerals Ltd. He gifts them to his wife. Since this transfer was without consideration, the interest earned on the debentures will be clubbed with Mr. Soham’s income.

Example 2:

Mr. Sunil gifts ₹9,40,000 to his wife, who then invests it in debentures. Since the original transfer was without consideration, the interest earned on the debentures will also be clubbable with Mr. Kapoor’s income.

Exceptions:

Clubbing provisions under Section 64(1)(iv) do not apply if:

1. The asset was transferred for adequate consideration.
2. The transfer was made as part of an agreement to live separately.
3. The asset was transferred before marriage (income earned after marriage is not clubbed).
4. The recipient spouse was no longer married to the transferor at the time of income accrual.

 

Will clubbing apply to income from assets transferred to a daughter-in-law?

Yes. Under Section 64(1)(vi), if an individual transfers an asset to their son’s wife (daughter-in-law) without adequate consideration, any income from the asset will be clubbed with the transferor’s income.

Exception:

If the transfer was made before the son’s marriage, the income will not be clubbed, even after marriage.

 

What if an asset is transferred to a third party for the benefit of a spouse or daughter-in-law?

Yes, clubbing still applies. Under:

• Section 64(1)(vii): If an individual transfers an asset to someone else for the benefit of their spouse, the income from the asset will be clubbed with the transferor’s income.
• Section 64(1)(viii): If an asset is transferred for the benefit of the son’s wife, the income from it will be clubbed with the transferor’s income.

 

Is a minor child’s income clubbed with the parent's income?

Yes. Section 64(1A) states that a minor’s income is added to the income of the parent who earns more (excluding the minor’s income). If the parents are separated, the income is clubbed with the parent who maintains the child.

Exceptions:

• If the minor earns money through manual labor, knowledge, skill, or talent, that income will not be clubbed.
• If the minor is disabled as per Section 80U, their income will not be clubbed.

Example:

Mr. Rajan has two minor children:

• Master A, a child artist, earns ₹1,00,000 from stage shows and ₹6,000 from bank interest.
• Master B, who has a disability under Section 80U, earns ₹1,20,000 from bank interest.

Since A’s income from talent (stage shows) is self-earned, it is not clubbed. However, his bank interest (₹6,000) is clubbed with Mr. Raja’s income. B’s income is not clubbed due to his disability.

Parents can claim an exemption of ₹1,500 per child under Section 10(32).

 

Will clubbing provisions apply if a member transfers assets to a Hindu Undivided Family (HUF)?

Yes. Under Section 64(2):

• Before the HUF is partitioned, all income from the transferred asset is clubbed with the transferor’s income.

After the HUF is partitioned, if the spouse receives any portion of the asset, income from that portion will still be clubbed with the transferor’s income.

Conclusion

The understanding of clubbing of income provisions necessarily has relevance to tax planning and compliance. These clauses ensure that income transferred to family members is duly taxed and hence prevent tax evasion. An understanding of important sections, frequent situations, and exceptions lets the taxpayer avoid legal traps while maximizing financial benefit. Advancements in clever tax planning, together with compliance with these provisions, help an individual legally save tax while incorporating issues of compliance with respect to the Indian tax law in 2025.