Normally, a person is taxed in respect of income earned by him only. However, in certain special cases the income of other person is included (i.e. clubbed) in the taxable income of the taxpayer. In such a case he will be liable to pay tax in respect of his income (if any) as well as the income of other people too. The situation in which the income of another person is included in the income of the taxpayer is called clubbing of income.
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. This is allowed under Section 64 of the IT 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 also taxed in your hand, 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. Now the interest earned on this FD would get clubbed in the total income of Hari and he would be liable to pay tax on the same. 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 will not be clubbed with Hari’s income.
Specified persons to club income
We cannot club income of any person on random basis while computing total income of an individual and also not all income of specified person can be clubbed. As per Section 64 of Income Tax Act, there are only certain specified income of specified persons which can be clubbed while computing total income of an individual.
When does Clubbing apply?
In case of following situations, clubbing provisions will apply:
|Section||Specified person||Specified scenario||Income to be clubbed|
|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 attracted 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 transferred 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 No clubbing of income in the following cases:
a. Where the asset is received as part of the divorce settlement
b. If assets are transferred 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 transferred 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 from such assets will be considered as your income and clubbed in your hands|
|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 from such assets will be considered as your income and clubbed in your hands|
|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 from such converted property shall be clubbed in the hands of individual|
Transfer of income without transfer of an asset to any person
Clubbing applies when you (transferor) transfer your income to some other person without transferring the ownership of the asset from which the income is derived. Therefore the income so transferred will still be included in your total income and also taxable in your hands.
For Example: Pranav transferred the income from his rental property, to his wife Divya. The property is in the name of Pranav only and ownership of the property is not transferred to Divya. In this situation, rental income will be taxed in the hands of Pranav only.
Transfer of asset (revocable transfer) to any person
- In case of a revocable transfer* of asset the clubbing will apply and hence the income from such asset will be taxable in the hands of transferor even though asset has been transferred.
- Clubbing not applicable if transfer by way of trust which is irrevocable during the lifetime of beneficiaries/ transferee
*Revocable transfer of asset means where a 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 future during the lifetime of the transferee.
For Example: If in the earlier 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. In this situation, rental income from the property will be taxed 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
- Your spouse income from such a firm/company will get clubbed with the income of the person (you or your spouse) having a higher total income. While comparing the total incomes, income from such a firm/company should be ignored.
- A person is said to have substantial interest if he/she individually or along with his/her relative holds 20% or above shares of the company or exercise the voting power of 20% or above. In the case of a firm if a person is entitled to have a share of 20% or above in profits.
- However the above clubbing provision shall not apply if the income earned by your spouse is due to practical application of professional/technical skill he/she possesses.
- Income other than salary, commission, fees or remuneration is not clubbed under this clause
Eg: 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 towards 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, Divya’s annual salary of Rs. 2,40,000 will be clubbed with Pranav’s income and it will be taxable in the hands of Pranav.
Income from the asset transferred to the Spouse against inadequate consideration
- The above income will get clubbed in your total income and you would be liable to pay tax on that income.
- However, the clubbing shall not apply if the above transfer is in a connection with an agreement to live apart or divorce.
- Let us understand the above provision with the help of the below examples:
- First Scenario: Rohan transferred an asset worth Rs.1,50,000 to his wife for a consideration of INR 50,000. Here ⅔ rd (two-thirds) of the income from the asset would get clubbed in Rohan’s income and he would be liable to pay tax on this income. However, balance ⅓ rd 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. Aksh 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 cash (asset) received was converted into another asset (FD) by Mrs. Aksh, the interest earned of INR 4,500 would be clubbed in the income of Mr. Aksh as per Section 64(1)(iv) of the Income Tax Act.
Note: As per the judgement in R Dalmia Vs CIT (1982) and 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 asset is acquired by the spouse out of pin money then the income from such assets cannot be clubbed with the income of her husband.
When an asset is transferred to any person or association of person for the immediate or deferred benefit of Your Spouse
In such a situation, any income out of such an asset would get clubbed in your total income and you would be liable to pay tax on the same.
Clubbing of Income of Son’s Wife
When asset is transferred to Son’s wife
Income earned by your Son’s wife from the asset transferred to her against inadequate consideration would get clubbed in your total income and you would be liable to pay tax on it. Cross transfers are also covered.
When an asset is transferred to any person or association of person for the immediate or deferred benefit of Son’s wife
Here the Income earned from the asset transferred against inadequate consideration would get clubbed in your total income and you would be liable to pay tax on it.
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 when income is earned.
Clubbing of Income of a Minor child
Any income earned by a minor child (including married minor daughter) will get clubbed with income of the parent whose total income is higher (before inclusion of income of minor child).
In case of a minor child, whose parents are living apart because their marriage relationship does not exist, any income earned by such minor child would get clubbed in the total income of the parent who is maintaining the child.
The income of a minor child would not be clubbed in following circumstances:
- The minor child has earned income through his/her manual work
- The minor child has applied his/her skill, talent, specialized knowledge and experience for earning the income.
- If the minor child is suffering from any disability (disability defined 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. It would not get clubbed with the total income of the Parents.
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 the income from such property will get clubbed with your total income and you would be liable to pay tax on it.
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 received by your spouse would get clubbed in your total income and you would be liable to pay tax on it.
Except for ITR-1 & ITR-4S, every other ITR contains a section where you can add the income of other persons included in your income. The details which you have to provide are:
– Name of person
– PAN of a person (Optional)
– Nature of Income
You also need to make sure that whatever income you enter over here has already been added to the incomes in their respective heads while filing ITR on Income Tax Portal.
Clubbing provisions will be equally applicable for losses because: For example, if a person has incurred some loss, in such a situation, such a loss is not allowed to be transferred to anyone and it will be clubbed in his/her own income.
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 a 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 life time of the beneficiary or a transfer which is not revocable during the lifetime of the transferee.