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You must have heard people saying saving income tax is very easy. They transfer a part of their income to their wife, children, parents, and relatives to bring their income below the taxable limit. However, they are often surprised when scrutiny notices arrive from the Income Tax Department. Taking these shortcuts can put you in a trap of section 64 (clubbing of income) of the income tax department, inviting the wrath of the income tax department.
Today we'll simplify and explain all the rules of Clubbing of Income in detail.
Clubbing of income refers to the inclusion of income earned by one person in the tax assessment of another person. This mechanism is designed to prevent taxpayers from evading tax liability by transferring income to family members or other entities. For example, if an individual transfers income-generating assets to their spouse or minor child, the income generated from those assets is clubbed with the income of the transferor. In simple terms, If income of any other person is included in your income and taxed in your hands, such process is called Clubbing of Income.
For instance, let’s assume your total income is ₹3,00,000, consisting of ₹2,00,000 from salary and ₹1,00,000 from rental income. To reduce your taxable income below the basic exemption limit, you decide to transfer the rental income of ₹1,00,000 to your wife without any valid proof. However, when calculating tax, your taxable income will still be considered ₹3,00,000 and not ₹2,00,000, as you assumed the ₹1,00,000 would be taxed in your wife’s hands.
This happens due to the provisions of Clubbing of Income under Section 64 of the Income Tax Act, 1961. There are many different scenarios to which the provision of Clubbing of Income applies. Let us discuss each of them one by one:
Let’s understand this with a simple example. Suppose you are earning a rental income of ₹10,000 per month from one of your house properties. Now, if you decide to transfer this rental income to your friend, Mr. X while retaining ownership of the property, the provisions of Clubbing of Income will apply.
In this case, ₹10,000 per month will still be included in your taxable income and not in Mr. X's hands. This is because you have transferred only the income and not the asset (i.e., the house property).
When you transfer an asset to another person while including a clause that allows you to reclaim ownership at any time in the future, this is referred to as a Revocable Transfer. As per the provisions of Clubbing of Income, any income generated from an asset involved in a revocable transfer will be taxable in the hands of the transferor.
For example, Karan transfers his house property to Arjun with an agreement that the asset will revert to Karan after two years. In this case, as per the clubbing of income provisions, any income earned by Arjun from the house during these two years will be included in Karan's income.
In common parlance, the easiest way to save tax is practiced by transferring income in the name of your spouse. There are very special provisions to regulate such transfers. All the different scenarios are discussed below.
| Your spouse is employed because of his/her professional/ technical qualifications. | Provision of Clubbing of Income will not apply. In other words, that remuneration will be taxable in the hands of your spouse only. For e.g., You are a partner in a firm and entitled to a 40% share in profits. Your wife is employed in the same firm as the general manager at 20,000 p.m. due to her professional capacity then such income shall not be clubbed in your hand. |
| No such professional/ technical qualification. | Any remuneration received by your spouse from such concern/ entity shall be clubbed and taxed in your hands. |
Clubbing of income provisions also applies in case of any transfer of income made to your daughter-in-law. The situation is discussed below.
Any income earned by a minor child is clubbed in the hands of either of his/her parents, whose income (excluding minor child income) is greater. However, the department has given certain situations in which the clubbing of income provisions will not apply. These are:
Moreover, an exemption of Rs 1500 is provided on income earned by each minor child. Do not forget to claim this exemption, folks!
There are many people who ask, what about the income earned by his/her major child? There is no need for a special provision in such a case. A major child is, by default covered under a taxable limit applicable to an individual up to 60 years of age. So, if your major child is earning income above 2,50,000 (before any deduction). Then, he is liable to file his income tax return. No clubbing of income provisions shall apply.
The concept of a Hindu Undivided Family (HUF) has existed for centuries, and the Income Tax Act also recognizes HUF as a separate assessee. In simple terms, an HUF is required to file an income tax return. To learn more about HUF as an assessee, you can read our detailed blog. Naturally, the provisions of clubbing of income are also applicable in the case of a HUF.
So far, we’ve discussed how the Income Tax Department can track your income using the clubbing of income provisions. But as the saying goes, where there’s a will, there’s a way! Now, we’ll share some smart tips to help you maximize your income tax savings.
Clubbing provisions not only affect your income calculation but also the way a return is filed. The best way to understand is through an example:
Mr. Happy has a salary income of ₹6,00,000 and a minor son, Master Super Happy. Super Happy, being a cheerful and carefree child, enjoys playing lottery games with his father. One lucky day, Super Happy won ₹2,00,000 in a lottery.
Since Super Happy is a minor, his lottery income will be clubbed with Mr. Happy's income. As a result, Mr. Happy will need to file his income tax return using Form ITR-2. Had there been no lottery income from his minor son, Mr. Happy could have filed his return using Form ITR-1.
The basic point is that, depending upon the nature of income to be clubbed, the ITR Form will vary. So next time, please keep in mind before choosing your ITR Form if you have any clubbed income.
The concept of clubbing of income is very technical and confusing if not understood properly. Using any tax saving technique without proper consultation or guidance can lead you to trouble in the form of penalties and prosecution. Consult Online CAs Now!
Clubbing of income refers to the inclusion of income earned by one person in the tax assessment of another person. This is done to prevent tax evasion by transferring income to family members or other entities.
Yes, as per Section 60, if a person transfers income from an asset owned by them without transferring the asset itself, the income from such an asset is taxed in the hands of the transferor.
A revocable transfer is one in which the transferor retains control or the right to reclaim the asset. As per Section 61, income from a revocable transfer is taxed in the hands of the transferor.
Yes, there are exceptions, such as:
When income is clubbed, it is added to the total income of the transferor or another person for tax calculation. This can result in higher tax liability for the transferor or recipient, as the income is treated as if it were earned by them.
