Clubbing of Income in India: Key Tax Rules, Provisions & Exemptions Explained

Clubbing of Income in India: Key Tax Rules, Provisions & Exemptions Explained

The Indian Income Tax Act primarily follows the principle of taxing an individual on the income they personally earn. However, in specific situations, the income of another person may be added (or clubbed) with the taxpayer's income. This is known as the clubbing of income, which prevents tax evasion through the diversion of income to family members or other entities. Sections 60 to 64 of the Income Tax Act deal with different clubbing provisions.

This article explains the concept of clubbing of income, its various provisions, practical examples, and commonly asked questions.

What is Clubbing of Income?

Clubbing of income refers to the practice of including another person's income into the taxable income of an individual under certain circumstances. This ensures that taxpayers do not reduce their tax liability by transferring income to their spouse, minor child, or other relatives.

Example:

If a father transfers his rental income to his minor child while still owning the rental property, the rental income will be taxed in the father's hands, not the child's.

Cases Where Clubbing of Income is Applicable

The clubbing of income applies in several scenarios as per Sections 60 to 64 of the Income Tax Act. Let's break down each of these cases with practical illustrations.

1. Transfer of Income Without Transfer of Asset (Section 60)

If a person transfers income from an asset without transferring ownership of the asset, the income is still taxable in the hands of the transferor.

Example:

Mr. Alok owns a shop and earns a rental income of Rs. 1,00,000 per year. If he transfers this rental income to his friend but retains ownership of the shop, he will still be liable to pay tax on the rental income.

2. Revocable Transfers (Section 61)

A revocable transfer means a transfer where the original owner retains control over the asset or its income. In such cases, the income generated from the asset is taxed in the hands of the original owner.

Example:

If Mr. A transfers a fixed deposit to his wife but retains the right to revoke the transfer, then the interest income earned from the deposit will be taxed in Mr. A’s hands.

3. Income of Spouse (Section 64(1)(ii))

If a spouse receives income from a concern where the other spouse has substantial interest, and the income is not due to technical or professional expertise, it is clubbed with the income of the spouse having a substantial interest.

Example:

Mr. X owns 30% of a company's shares. His wife is employed in the same company without relevant qualifications and receives a salary of Rs. 50,000 per month. This income will be clubbed with Mr. X’s total taxable income.

4. Transfer of Assets to Spouse (Section 64(1)(iv))

If an individual transfers an asset to their spouse without adequate consideration, the income generated from the asset is clubbed with the transferor's income.

Example:

Mr. Alok gifts Rs. 10 lakh to his wife, and she invests it in fixed deposits. The interest earned will be added to Mr. Alok's taxable income.

5. Transfer of Assets to Son’s Wife (Section 64(1)(vi))

If an individual transfers assets to their daughter-in-law without adequate consideration, the income from such assets is clubbed with the transferor's income.

Example:

Mr. Puri gifts his house property to his daughter-in-law. The rental income from this house will be taxed in Mr. Verma's hands.

6. Transfer of Assets for the Benefit of Spouse or Son’s Wife (Section 64(1)(vii) & (viii))

If a person transfers an asset to a third party or an association of persons for the benefit of their spouse or son's wife, the income derived from such an asset is clubbed with the transferor’s income.

Example:

If Mr. Varun transfers an asset to a trust that benefits his wife, the income from the asset will be taxed in Mr. Arjun’s hands.

7. Income of a Minor Child (Section 64(1A))

A minor child's income is clubbed with the income of the parent whose total income (excluding the minor’s income) is higher. However, an exemption of Rs. 1,500 per minor child is allowed.

Exceptions:

• If the minor child earns income due to their own manual work, skill, or talent, it is not clubbed.
• If the minor child has a disability covered under Section 80U, their income is not clubbed.

8. Transfer of Asset to Hindu Undivided Family (HUF) (Section 64(2))

If a person transfers an asset to an HUF without adequate consideration, the income from such an asset is clubbed with the individual's income until the partition of HUF.

Situations Where Clubbing Provisions Do Not Apply

The clubbing provisions do not apply in the following cases:

• If the transfer is made for adequate consideration.
• If the asset is transferred before marriage.
• If the transfer is in connection with an agreement to live apart.
• If the transferee is no longer a spouse at the time of income accrual.

Frequently Asked Questions (FAQs)

1. What is the main purpose of clubbing of income?

The purpose is to prevent tax evasion by ensuring that individuals do not reduce their tax liability by shifting income to family members or other entities.

2. Can I avoid clubbing provisions by transferring assets before marriage?

Yes, if an asset is transferred before marriage, the clubbing provisions do not apply even after marriage.

3. Is a minor’s salary from acting or sports clubbed with the parent’s income?

No, if a minor earns income due to their own skills, talent, or profession, it is not clubbed. However, any subsequent interest or investment income from such earnings is clubbed.

4. How can a taxpayer claim TDS deducted on a minor’s income?

The parent in whose income the minor’s income is clubbed can claim the TDS credit.

5. If a spouse earns a salary from a company where I have substantial interest, is it clubbed?

If the spouse is employed based on professional qualifications and experience, their salary is not clubbed. If they are employed without relevant skills or expertise, it is clubbed with the individual's income.

Conclusion

Clubbing of income is a crucial provision under the Income Tax Act to prevent tax avoidance. Understanding these rules helps taxpayers remain compliant while planning their taxes efficiently. If unsure about a specific case, it is advisable to consult a tax professional.