Clubbing of Income

The practice of diverting self income to some other person like a spouse, minor child, etc. to reduce own Income-tax liability was very popular in India. The same was noticed by the Income-tax Department. Accordingly, amendments were made in the Income-tax Act specifying certain cases where the income of one person is statutorily required to be included in the income of another person if some conditions are satisfied. This inclusion is known as “Clubbing of Income”. Eg. If a husband diverts some part of his income to his wife to reduce his tax burden. Then, such transferred income of a wife is added and taxed as income of the husband only and not his wife. The clubbing provisions are applicable even if there is no intention to reduce tax liability.

Income-tax Act provides the following situations in which the income of one person is clubbed with the income of another:

A] Section 60- Transfer of income without transfer of asset:

This section is applicable if-

1. The taxpayer owns an asset;
2. He transfers the income earned from this asset to another person;
3. But he keeps the ownership of that asset with himself;

Then such income is clubbed into the income of the transferor.

Eg. Mr Ajay is having an FD with a bank. He transfers interest earned on FD Rs. 1,60,000/- to his friend Mr Boman. However, Mr Ajay kept the ownership of FDs with him. In this case, interest earned of Rs. 1,60,000/- shall be treated as income of Mr Ajay only and not of Mr Boman.

B] Section 61- Revocable/cancellable transfer of asset:

This section is applicable if-

1. The taxpayer owns an asset;
2. He transfers the ownership of this asset to another person;
3. But the transfer is revocable* or cancellable;

Then such income is clubbed into the income of the transferor.

* Revocable/Cancellable transfer: A taxpayer transfers his asset to another person on the condition that such transfer can be cancelled by him at any time, then this transfer shall be treated as a Cancellable transfer.

Following are the various examples of Cancellable Transfers-

1. Mr Sujay transfers his land to Mr Yogesh under an agreement with a condition that Mr Sujay can cancel the agreement anytime and take back the asset. Then income earned from such land is added to the income of Mr Sujay.

2. Mr Pranav transfers his land to Mr Shaan under an agreement where the agreement states that Mr Pranav can re-transfer the land in his name at any time. Then income earned from the land is added to the income of Mr Pranav.

C] Section 64(1)(ii)- Salary paid to spouse:

This section is applicable if-

1. The taxpayer is an individual;
2. He/she has a substantial interest* in any organisation;
3. The spouse of the taxpayer is working in that organisation;
4. The spouse is not having any technical or professional knowledge or experience.

Then the salary paid to the spouse is clubbed in the income of the taxpayer.

*Substantial interest- Owning at least 20% of shares or profits of the organisation is known as having substantial interest in the organisation.

Eg. Mr Suyog is holding 30% shares of AB Ltd. Mrs Nisha, his wife, is working as HR manager in AB Ltd with a salary of Rs. 50,000/-pm. But she is not qualified for that post also she has no experience in HR. Then, the salary paid to Mrs Nisha is clubbed in the income of Mr Suyog.

D] Section 64(1)(iv)- Income from assets transferred to spouse:

This section is applicable if-

1. The taxpayer is an individual;
2. He/she owns an asset;
3. He/she transferred this asset to his/her spouse;
4. The asset is transferred for a lower amount than its fair market value;

Then the income earned from this asset is clubbed in the income of the taxpayer.

• Exception- If the taxpayer transfers the asset due to a divorce agreement between them, then income is not clubbed.

Eg. Mrs Poonam transfers her Land of Rs. 50,00,000/- to her husband only for Rs. 10,00,000/-.

Then income earned on Land is clubbed in the income of Mrs Poonam.

Eg. Mr Deepak transfers his Fixed Deposit of Rs. 2,00,000/- to his wife without any consideration.

Then the interest income earned by his spouse on FD is clubbed in the income of Mr Deepak.

Eg. As per the divorce agreement between Mr Satish and his wife, Mr Satish transfers a land of Rs. 10,00,000/- to her wife without any consideration. In this case, income earned from land is not clubbed in the income of Mr Satish. Here, the income is taxed in the hands of his wife only.

E] Section 64(1)(vi)- Income from assets transferred to son’s wife:

This section is applicable if-

1. The taxpayer is an individual;
2. He/she owns an asset;
3. He/she transferred this asset to his/her son’s wife;
4. The asset is transferred for a lower amount than its fair market value;

Then the income earned from this asset is clubbed in the income of the taxpayer.

Eg. Mr Ganesh transfers his shares of Rs. 50,000/- to his son’s wife only for Rs. 10,000/-. Then any income earned from these shares is clubbed in the income of Mr Ganesh.

F] Section 64(1)(vii)- Income from assets transferred to another person (for the benefit of a spouse):

This section is applicable if-

1. The taxpayer is an individual;
2. He/she owns an asset;
3. He/she transferred this asset to any other person or persons;
4. The asset is transferred for the benefits of the spouse of the taxpayer;
5. The asset is transferred for a lower amount than its fair market value.

Then the income earned from this asset is clubbed in the income of the taxpayer.

Eg. Mr Sharma transfers his shares of Rs. 1,20,000/- to his friend Mr Verma for Rs. 30,000/- under an agreement that states that income earned on shares should be used only for the benefits of his spouse, Mrs Sharma. Then such income on shares is clubbed in the income of Mr Sharma.

G] Section 64(1)(viii)- Income from assets transferred to another person (for the benefit of son’s wife):

This section is applicable if-

1. The taxpayer is an individual;
2. He/she owns an asset;
3. He/she transferred this asset to any other person or persons;
4. The asset is transferred for the benefits of the son’s wife of the taxpayer;
5. The asset is transferred for a lower amount than its fair market value.

Then the income earned from this asset is clubbed in the income of the taxpayer.

Eg. Mrs Priya transfers her bonds of Rs. 3,00,000/- to trust for Rs. 50,000/- under the agreement which states that income earned on bonds should be used only for the benefits of her son’s wife. Then such income on shares is clubbed in the income of Mrs Priya.

H] Section 64(1A)- Income of Minor Child:

All the incomes of the minor are clubbed in the incomes of his/her parent. The first time when minor earns any income, the Gross Total Income of both the parents (father and mother) excluding the minor’s income is compared. Then income of a minor is added to the income of a parent having a higher Gross Total Income. From next year onwards whenever the minor child earns any income again, this income is clubbed in the income of the same parent as it was clubbed earlier.

In case the marriage of the parents does not subsist, then the income of the minor is added to the income of a parent who maintains that minor in that financial year. However, if both the parents of a minor are not alive, then the income of the minor shall not be clubbed in the income of any grandparents, relatives, guardians or any other person or even the minor.

Note- Where the income of a minor child is clubbed in either of his parent’s income then the said parent can claim a maximum exemption of Rs. 1,500/- for each child from clubbed income.

Situations when the income of minor is not clubbed:

1. If a minor is suffering from a disability covered U/s. 80U of the Income Tax Act, 1961 (i.e. Blindness, low vision, mental retardation, mental illness, locomotor disability, autism etc.), then the income of such minor is not clubbed in the income of parent;
2. If the minor has earned the income using his own endeavour;
3. If a minor has earned the income using his skills, talent or experience.

Eg. 1) Kapil, a minor, received Rs. 1,50,000/- during a year as gifts from his relatives on the occasion of his birthday. For that year, the Gross Total Income (before clubbing under this section) of his father is Rs. 5,00,000 whereas that of his mother is Rs. 4,20,000/-. Hence, the income of the minor shall be clubbed in the income of his father since his Gross Total Income is more than his mother's.

Also, the father can claim the exemption of Rs. 1,500/- from the clubbed income of Rs. 1,50,000/-.

Eg. 2) Anurag, a minor child suffering from autism, received Rs. 50,000/- as interest on bonds. Here, since a minor is suffering from a disability covered by U/s.80U of the Income Tax Act, 1961; his income shall not be clubbed in the income of any of his parents.

Eg. 3) Madhuri, a minor, won Rs. 5,00,000/- by participating in a game show. Here, since a minor has earned this income using her own talent, her income shall not be clubbed with the income of her parents.

I] Section 64(2)- Clubbing in case of partition of HUF:

If-

1. The taxpayer is an individual who is a member of HUF;
2. He/she owns an asset;
3. He/she transferred this asset to the HUF;
4. The asset is transferred for a lower amount than its fair market value.

Then the income received by the HUF from such transferred asset is clubbed in the income of the taxpayer (till the complete partition of HUF).

Afterwards when the HUF is completely partitioned then the share of income from such asset received by the spouse of the taxpayer shall be clubbed in the hands of the taxpayer.

Eg. Mr. Harshal owns some bonds valued at Rs. 5,00,000/-. He transferred these bonds to his HUF for Rs. 2,00,000/- on July, 2017. The interest income earned by HUF (till complete partition) will be taxable in the hands of Mr Harshal.

If during March 2018, HUF is completely partitioned and all the properties of HUF are divided among all its members. The wife of Mr Harshal received interest on these bonds of Rs. 20,000/-. Here, the interest received shall be clubbed in the income of Mr Harshal.

The taxpayer should take care of the above provisions while transferring his assets so that clubbing provisions will not get attracted. It is always advisable that one should transfer his asset for adequate consideration only.