A taxpayer in India should pay income tax on all the incomes that he earns during the financial year. However, in certain special cases the income of other person is included (i.e. clubbed) in taxable income of taxpayer. In such cases, the taxpayer is liable to pay tax on his income and income of other people. The situation in which income of another person is included in the income of taxpayer is called clubbing of income. A taxpayer should follow the provisions for clubbing of income as per Section 64 of the Income Tax Act. The taxpayer should report the total income including such income while filing ITR on the income tax website.
What is Clubbing of Income under section 64 of the Income Tax Act?
Clubbing of income means income of other person included in assessee’s total income. The tax provisions for clubbing of income are defined under Section of the Income Tax Act. This means that a person cannot divert his income to any other person. For example: If the income of your spouse is included in your total income and you end up paying tax on your income and your spouse’s income too, then this is known as clubbing of income.
However, there would not be any clubbing of the income, earned from the investment of clubbed income. For example, Hari transfers INR 10,000 to his wife Priya and Priya invests the money in an FD scheme. The FD interest will get clubbed in total income of Hari and he is liable to pay tax on it. However, if Priya re-invests the interest earned (i.e. clubbed income) in some FD or any other investment scheme then the income from such re-investment would be taxable in the hands of Priya only. This interest income from reinvestment is not subject to clubbing provisions. Thus, Hari is not liable to pay tax on the same.
Specified persons to club income
As per Section 64 for clubbing of income, the income of individual taxpayer should include income of specific persons. Let us understand the situations where provisions of clubbing of income apply.
|Section||Specified person||Specified scenario||Clubbing of Income|
|Section 60||Any person||
Transfer of Income without transfer of Assets either by way of an agreement or any other way,
– Any income from such asset will be clubbed in the hands of the transferor.
– Irrespective of whether such transfer is revocable or not.
|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 step child, adopted child, and minor married daughter]||– Income will be clubbed in the hands of higher-earning parent.
If marriage of child’s parents does not subsist, income shall be clubbed in the income of that parent who maintains the minor child in the previous year
– If minor child’s income is clubbed in the hands of parent, then exemption of INR 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 application of his skill and talent or specialized knowledge and experience
– Income earned by a major child. This would also include income earned from investments made out of 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 a substantial interest||
– Income shall be clubbed in the hands of the taxpayer or spouse, whose income is greater (before clubbing).
The exception to clubbing: – Clubbing is not applicable if the spouse possesses technical or professional qualifications in relation to any income arising to the spouse and such income is solely attributable to the application of his/her technical or professional knowledge and experience
|Section 64(1)(iv)||Spouse||Income from assets that taxpayer transfers directly or indirectly to the spouse without adequate 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 clubbing i.e. no clubbing of income in the following cases:
a. Where the spouse receives the asset as part of the divorce settlement
b. If the taxpayer transfers the asset before marriage
c. No husband and wife relationship subsists on the date of accrual of income
|Section 64(1)(vi)||Daughter-in-law||Income from the assets that taxpayer transfers to son’s wife for inadequate consideration||Any income from such assets transferred is clubbed in the hands of the transferor|
|Section 64(1)(vii)||Any person or association of person||
Transferring any assets directly or directly for inadequate consideration to any person or AOP to benefit your daughter-in-law either immediately or on a deferred basis
|Income of taxpayer shall include income from such assets|
|Section 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 of taxpayer shall include income from such assets|
|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 of taxpayer shall include income from such property|
Transfer of income without transfer of an asset to any person
Clubbing applies when the transferor transfers the income to some other person without transferring the ownership of the asset from which the income arises. As per provisions for clubbing of income, the total income of the transferor shall include such income and he must pay tax on it.
For Example – Pranav owns a property. He transfers the rent income to his wife Divya without transferring the ownership of the property. As per the provisions for clubbing of income, this is a transfer of income without the transfer of an asset. Therefore, Pranav is liable to pay tax on such rental income.
Transfer of asset (revocable transfer) to any person
- Revocable transfer of asset means the transferor retains the right or power to re-acquire the whole or any part of the asset or the income from such asset at any time in the future during the lifetime of the transferee.
- In case of a revocable transfer of assets, the provisions of clubbing will apply. Thus, even if the owner transfers the asset to the transferee, the income from such asset will be taxable in the hands of the transferor due to clubbing of income.
- Clubbing of income is not applicable if the transfer is by way of trust which is irrevocable during the lifetime of beneficiaries/ transferee.
For Example: Pranav transfers the rental income as well as the property to Divya, with a condition that he can re-acquire the property whenever he wishes. This is a situation of revocable transfer and the rental income is taxable in the hands of Pranav only.
Clubbing of Spouse Income
Income earned by your Spouse from the firm/company in which you have substantial interest
Meaning of Substantial Interest
- Individual either himself or with a relative/s beneficially owns shares having 20% or more of voting power in a company
- Individual either himself or with a relative/s is entitled to 20% or more of profits in a firm
If you have a substantial interest in the firm or company from which your spouse earns the income, below are the applicable tax provisions for clubbing of income.
- Your total income shall include the income of your spouse if your total income is higher than the total income of your spouse.
- If the income that your spouse earns is due to the practical application of professional or technical skills that he/she possesses, the provisions for clubbing of income shall not apply.
- Clubbing provisions shall not apply to any income other than salary, commission, fees, or remuneration.
For Example: Pranav holds 51% of the shares in a private limited company. His wife Divya is getting a salary of Rs. 20,000 per month from the same company. She is not an active employee and does not contribute to the company’s operations. Pranav’s total annual income is Rs. 10,00,000 whereas Divya’s total income (excluding salary from the company) is Rs. 5,00,000. In this situation, Pranav’s total income shall include Divya’s salary of INR 2,40,000 and he shall be liable to pay tax on INR 12,40,000.
Income from the asset transferred to the Spouse against inadequate consideration
If the taxpayer transfers an asset to the spouse for inadequate consideration, below are the applicable tax provisions for clubbing of income from such asset.
- The taxpayer’s income shall include income from such asset that he/she transfers to spouse for inadequate consideration.
- If the transfer of asset is in connection with an agreement to live apart or divorce, the provisions of clubbing of income shall not apply.
- Let us understand the above provision with the help of the below examples:
- First Scenario: Rohan transfers an asset worth INR 1,50,000 to his wife for a consideration of INR 50,000. Rohit’s total income shall include ⅔rd (two-thirds) of the income from the asset and he would be liable to pay tax on this income. However, the balance ⅓rd will be taxable in the hands of his wife as she has paid INR 50,000 being 1/3rd (one-third) of the value of the property.
- Second scenario: Mr. Akash gifted INR 5,00,000 to his wife. She invested this amount in the fixed deposit and received interest of 4,500 INR p.a. (Gift received from husband is exempt in the hands of his wife.) Since Mrs. Akash converts the cash (asset) received into another asset (FD), the interest she earns of INR 4,500 would be clubbed in the income of Mr. Akash as per Section 64(1)(iv) of the Income Tax Act.
Note: As per the judgement in R Dalmia Vs CIT (1982) and a few other judgments, pin money (i.e. an allowance given to the wife by her husband for her personal and usual household expenses) is not taxable. Further, if the spouse acquires the asset out of pin money, then the provisions of clubbing of income shall not apply.
When taxpayer transfers an asset to any person or association of person for the immediate or deferred benefit of Spouse
When a taxpayer transfers an asset for the benefit of spouse for inadequate consideration , their total income shall include the income that arises out of such asset and they are liable to pay tax on the same.
Clubbing of Income of Son’s Wife
When taxpayer transfers asset to son’s wife
If the taxpayer transfers asset to son’s wife for inadequate consideration, the total income would include the income that their son’s wife earns on the said asset. The taxpayer is liable to pay tax on the total income as per the provisions of clubbing of income.
When taxpayer transfers asset to any person or association of person for the immediate or deferred benefit of son’s wife
When a taxpayer transfers an asset for the benefit of son’s wife for inadequate consideration, their total income shall include the income that arises out of such asset and they are liable to pay tax on the same.
Note: Clubbing would be applicable only when your relationship with spouse and son’s wife exist both at the time of transfer of asset and at the time eaning of income.
Clubbing of Income of a Minor child
The parent that has a higher total income shall include the income of a minor child (including married minor daughter) as per the provisions of clubbing of income.
In case of a minor child, whose parents are living apart because their marriage relationship does not exist, any income that such minor child earns would get clubbed in the total income of the parent who is maintaining the child.
Clubbing of income of a minor child would not apply in the following circumstances:
- The minor child earns income through his/her manual work
- The minor child applies his/her skill, talent, specialized knowledge, and experience for earning the income
- If the minor child is suffering from any disability (disability as per Section 80U)
- In case of transfer of house property to married minor daughter, the clubbing will not apply here. Hence any income generated by House property would not be taxable in the hands of Parents.
Clubbing of Income of a Major child
There will not be any clubbing of the income earned by major child (18 years and above) with the total income of the parents. Whether the major child is earning using his own specialization/skill or on investment of money or asset transferred to him by his Parents.
For example: Rohan who is 18 years old gets Rs. 50,000 as gift from his Father/Mother. He invest the money in a FD scheme. Now the interest income on FD would be taxable in the hands of Rohan only. The provisions of clubbing of income will not apply in this case.
Clubbing of Income from H.U.F Property
If you are a member of a HUF and you transfer your property to the common pool of such HUF for inadequate consideration, then your total income shall include the income from such property. You shall be liable to pay tax on the total income as per the provisions of clubbing of income.
However, when this transferred asset gets distributed among family members as a result of the complete or partial partition of HUF, the income from the asset that your spouse receives would get clubbed in your total income and you would be liable to pay tax on it.
Except for ITR-1 & ITR-4, every other ITR contains a section where you can report income as per provisions of clubbing of income. The details which you have to provide are:
– Name of person
– PAN of a person (Optional)
– Nature of Income
Further, you must ensure that you report such income under the respective heads too while filing ITR on Income Tax Portal.
Revocable transfer is generally a transfer in which the transferor directly or indirectly exercises control/right over the asset transferred or over the income from the asset.
As per section 61, if a transfer is held to be revocable, then income from the asset covered under revocable transfer is taxed in the hands of the transferor. The provisions of section 61 will not apply in case of a transfer by way of trust which is not revocable during the lifetime of the beneficiary or a transfer that is not revocable during the lifetime of the transferee.