Clubbing Of Income Under Section 64 of Income under Income Tax Act
Know when your income can be clubbed and how to avoid it
You must have heard people saying “Take payments in wife name to save tax”. In India we have progressive system of taxation, that means as your income increases, you have to pay more taxes as per the applicable income tax slab. In order to avoid paying high taxes many people transfer their assets or arrange the sources of income in the name of their wife, children, parents and relatives to bring down their income.
In order to curb such tax avoidance practices, the income tax introduced “clubbing of income “ provision under section 60 to section 64 of the income tax act.
Today we’ll simplify and explain all the rules of Clubbing of Income in detail.
What is Clubbing of Income in Income Tax Act?
When income of other person is included in your income and taxed in your hands, then such situation is called Clubbing of Income. The income clubbed in your income is called deemed income. The provisions of clubbing of income are applicable only on individuals and no other type of assessee like firm/HUF/Company etc.
Let’s say you have a total income of Rs 3,00,000. It comprises salary income worth Rs 2,00,000 & rental income of Rs 1,00,000. With aim to fall below the basic exemption limit, you transfer rental income without transferring the house ownership in your wife’s name. Now, while calculating tax, your taxable income shall be taken at Rs 3,00,000 not Rs 2,00,000. This is because of the income tax provisions on Clubbing of Income.
Income Tax Sections on Clubbing of Income
|Income Tax Provision||Transaction Covered|
|Section 60||Transfer of Income without Transfer of Asset|
|Section 61||Revocable Transfer of Asset|
|Section 64(1)(ii),64(1)(iv),64(1)(vii)||Clubbing of Income of Spouse|
|Section 64(1)(vi),64(1)(viii)||Clubbing of Income in case of Son’s Wife|
|Section 64(1A)||Clubbing of Income of Minor Child [Less than 18 years]|
|Section 64(2)||Clubbing of Income & HUF|
When will Clubbing of Income is applicable?
There are different scenarios under which provision of Clubbing of Income applies. Let us discuss each of them one-by-one.
- Transfer of Income without Transfer of Asset [Section 60]
When a person transfer the income without transferring the ownership of the assest from which such income is earned. Then, such income will be taxable in the hands of transferor. Most popular examples that we see is the rental income , when the owner of the property asks his tenant to make the rental payments in his/her parents/wife or children name.
Let us explain to you with a simple example: Ashish owns a house in Jaipur and is earning rental income of Rs 20,000 p.m. on this. But, in order to save tax, he asked his tenant to make a rental payment in his wife's bank account. In this case though the income is received in a wife account, it will be taxed to Ashish as he transferred the income source without transferring the legal ownership of the house.
People often do tax-planning by transferring income to their family members by way of first drafting an agreement for transfer of income without the legal ownership transfer of assets and then take rental cheques in their family name . However, this is not sufficient , income tax clubbing provisions will still be applicable.
- Revocable Transfer of Asset [Section 61]
When a person transfer an asset to another person keeping a clause in the transaction which empowers transferor to take back the ownership anytime in future. Such a situation is called Revocable Transfer. As per provisions of Clubbing of Income, when a “revocable transfer” of asset is made then any income from that asset shall be taxable in hands of transferor. [Transferor: person who transfers the asset. Transferee: person who receives the asset.]
For instance, Karan transferred his house property to Arjun. There is a condition in agreement that asset will transfer back to Karan after 2 years. Now, as per clubbing of income, any income arising to Arjun from such house during 2 years will be included in Karan’s income only.
Till now, we have understood the basic provisions in Clubbing of Income. Let us dive-in further and discuss Clubbing of Income in case of spouse, son’s wife, minor child and HUF.
- Clubbing of Income of Spouse [Section 64(1)(ii), 64(1)(iv), 64(1)(vii)]
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 as below.
- Your spouse works in a concern/entity in which you have substantial interest. There are 2 aspects in this situation, discussed as below:
Your spouse is employed because of his/her professional/ technical qualification. 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 partner in a firm and entitled to 40% share in profits of the firm. Your wife is employed in the same firm as general manager and getting Rs 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 taxable in your hands only.
- When you and your spouse receive remuneration from a concern and both have substantial interest in that concern : In such case, remuneration of both will be clubbed in hands of that spouse whose income excluding such remuneration is higher. However, as per common view, if both spouse are earning remuneration due to their professional competence then provisions of clubbing shall not apply.
Note : Substantial interest means when you are entitled 20% or more share of profits (in case of firm) or not less than 20% voting power (in case of company) at any time during the year.
- If you have transferred any asset to your wife without adequate consideration : It is a very common practice, where a husband transfers an income earning asset in his wife’s name to save tax. These provisions have been introduced to target such tax avoidance practices.In this case, income from such assets shall be taxable in your hands. This provision of clubbing of income will not apply in case.
A . the asset is transferred for adequate consideration or
B. as a condition of divorce or
C. it was transferred before marriage.
- The nature of transferred gift is changed by the transferee : Sometimes it is seen that a gift transferred which was not taxable previously is further invested in a source such that it starts yielding income. In all such instances where nature of asset is changed by the transferee spouse provisions of section 64(1)(iv) are attracted and clubbing of income takes place. Read the Taxability of gifts
Mr Sharma gifted his wife Rs 5,00,000. The wife invests this amount in a FD and starts earning an interest on the same. WIll this interest income be taxable in the hands of Mr Sharma?
Since a gift of Rs 5,00,000 has been made to a relative it will not be taxable. But the interest earned on FD will be taxable in the hands of Mr Sharma as per the provisions of section 64(1)(iv). The clubbing provisions will be attracted as the form of asset transferred has been changed by the transferee i.e. Mrs Sharma.
- Any transfer of asset made to a third person or AOP : Such transfer must have been done without consideration or with inadequate consideration to ultimately benefit your spouse now or at some later time. Such routing of assets to defer the benefit from assets to your spouse will also be covered under the ambit of clubbing provisions.
- Your spouse works in a concern/entity in which you have substantial interest. There are 2 aspects in this situation, discussed as below:
- Clubbing of Income in case of Son’s Wife [Section 64(1)(vi),64(1)(viii)]
Clubbing of income provisions also apply in case of any transfer of income made to your daughter-in-law. The situation is discussed as below.
Asset has been transferred to your daughter-in-law without any proper consideration : In this case, any income generating from that asset will become taxable in your hands.
For e.g. you have, 10,000 10% Debentures of Rs 100 each which you have transferred to your daughter-in-law without any consideration. Now interest income of Rs 1,00,000 will be included and taxable in your hands.
Asset has been transferred to some other person or AOP to ultimately defer its benefits to your daughter-in-law :
In such a case when these transactions are carried out without any proper consideration just to route the income tax liability to other hands, it is closely monitored by the Income Tax Department and is added back to your income as per the clubbing of income provisions.
- Clubbing of Income of Minor Child [Less than 18 years] [Section 64(1A)]
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. For example, a Fixed deposit taken in the name of a minor child, the interest earned Will be clubbed with the income of the highest earning parent. However, as per Income Tax provisions there are certain situations in which the clubbing of income provisions will not apply. These are:
- When minor child is suffering from any disability as mentioned in Sec 80U, or
- When income is earned by minor child through manual work, or
- Income earned by minor child through his skill, talent, knowledge etc. For e.g. minor child wins money on TV shows like Indian Idol Junior winner, Voice India Kids etc.
Do not forget to claim this exemption folks!
- Clubbing of Income of Major Child
There are many people who ask, what about income earned by his/her major child? There is no need for a special provision in such a case. A major child is governed by the principles applicable to an individual up to 60 years of age. So, if your major child is earning income above Rs 2,50,000 (before any deduction), Then he is liable himself to file his income tax return. No clubbing of income provisions shall apply.
There might arise a situation where the child was minor but attained the status of major in the same financial year. In such a case income would be clubbed until such child was minor and not for the remaining part of the year.
- Clubbing of Income & HUF [Section 64(2)]
Existence of Hindu Undivided Family has been since ages. Income Tax provisions also recognize HUF as an assessee. In simple terms, an HUF is also liable to file income tax return. To read about HUF as an assessee, Hence, it’s obvious that clubbing of income provision is also attracted in case of HUF.
If any of your personal assets has been transferred to the HUF without any adequate consideration: In such case, all income from such asset shall be taxed in your hands.
In case of split of HUF in future the distributed property in your spouse hands will be clubbed with your income. For e.g. you have a house from which rental income of Rs 5,00,000 p.a. is earned by you. When you transfer this house to HUF without consideration or inadequate consideration then income of Rs 5,00,000 will be taxed in your hands only.
In which cases clubbing of income is not applicable?
- Income transferred before marriage :
Any asset or gift given to would be wife before the wedding will not be considered under the clubbing provisions. Since the relation of husband and wife should exist both at the time of transfer of asset and at the time of accrual of income.
- Income derived from clubbed income :
Except in case of minor when asset is transferred to spouse or daughter-in-law (son’s wife), any further income derived from the income generated shall not be clubbed. For eg: Mr X transferred an amount of Rs 5,00,000 to his wife. This amount is invested in an 10% FD, thus, the interest of Rs. 50,000/- which will be taxable in hands of Mr X as per clubbing provisions of the income tax act. Any income further generated by Mrs X using this interest amount will not be taxable in the hands of the husband. For example, Mrs X further invested this interest of Rs. 50,000/- and earned the interest of Rs. 5,000/-. This Rs. 5,000/- will not be taxable in the hands of the Husband, this will be taxable in the hands of wife only.
- Saved money is not asset transferred :
Any amount saved by the wife from money given for meeting daily or household expenses will not be covered under the ambit of clubbing provisions.
How to avoid clubbing of income ?
Till now, we shared how income tax department can nab your income using clubbing of income provisions. But like it’s said “when there’s a will, there’s a way”. Now, we’ll share some super-cool tips, using which you can magnify your income tax savings.
- Gift money to your wife or daughter-in-law before marriage:
If your wife/ daughter-in-law is not working, and having no income then you can save income up to Rs 2,50,000. But it is imperative to note that, this can be done only before marriage. If you give any money after marriage then clubbing provisions shall apply.
- Pay rent & save money:
If you are living with your parents and the house is in their name. Then you can pay rent to them and claim exemption of house rent allowance. Also, if you parents do not earn any other income, they can claim further benefit. They will fall within basic exemption limit and will have to pay less income tax.
- Health insurance of family members:
You can further claim deduction u/s 80D by getting a health insurance for your family. Maximum deduction which can be claimed is Rs 25,000 for individual and his/her spouse and children. When you pay premium for your parents who are senior citizen then the maximum deduction will be of Rs 50,000. Further, the deduction can be claimed for medical expenditure incurred for senior citizen parents also. It is within the limit of Rs 50,000
- Prefer Loan over gift:
You can give your spouse loan at lower interest rates as there is no official rule prescribed for describing interest rates in such cases. The only catch here would be to keep it documented and loan repayment should be made through traceable mode like banking channels. This will shift the tax liability in your spouse's hands and no clubbing would be done. However, it must be analysed properly on the basis of all relevant factors.
- Investments through Joint Account:
While opening a joint account make sure the primary holder is the one having lower tax liability. Since, in case of joint holding the taxability of interest income arises in the hands of the primary holder it can help you save on taxes. Also, the withdrawals will be treated in the nature of gift to relatives which is again taxfree.
- Investment in the name of a Non-working wife:
An income earned on the amount invested or transferred to your spouse will be clubbed but not the further income earned on such income. For example Suppose you took a house on name of your wife, rental income from such house say Rs 50,000 will be clubbed but if the house is in name of your wife then further income generated by investing this rental income of Rs 50,0000 will not be taxable in your hands.
Investing in products like PPF -
By investing in products like PPF (which is EEE product) in your spouse or minor child name, then as the maturity proceeds of PPF is tax-free, you will enjoy the tax-free income. Same applies to equity products.
Also, amount can be gifted to senior citizen parents, major child or earning spouse with lower tax liability who can further invest this amount in PPF to earn more tax-free returns.
How to file ITR in case of Clubbing of Income?
In case the clubbed income is in the nature of interest, winnings from lotteries, puzzles, game shows etc then it will go under Income From Other Sources, or if it is the nature of rent from residential property then it will be taxed under Income From House Property. Likewise in nutshell we can say that the head of clubbed income will always be the same as its source of generation.However, clubbing provisions will affect your income calculation and also the way return form that is to be filed.
Let us explain through an example:
Mr. Happy has only a salary income of Rs 6,00,000. He has a minor son Master Super Happy. Now Super Happy is a happy go lucky chap. He likes to play lottery games with his papa Mr. Happy. One fine day, Super Happy became super lucky and won Rs 2,00,000. Since, Super Happy is minor therefore his income will be clubbed in Mr Happy’s income. Now Mr. Happy has to file his return in form ITR 2. If there would have been no “lottery income” of his minor son then he’d have used ITR 1 Form.
The basic point is that, depending upon the nature of income to be clubbed ITR Form will vary. So next time, please keep in mind before choosing your ITR Form if you have any clubbed income.
Tax-Planning should be done while keeping the above clubbing provisions in mind as when the clubbing provisions are invoked and you forget to comply with, it may lead to tax, interest and penal consequences.
Neglecting small clubbing provisions can lead to big penal consequences. Don't wait..take the expert’s Help Now!!
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. Also, as the ITR filing date coming closer, you can file return for free by visiting Tax2Win.
We hope that after reading the above guide, the concept of Clubbing of Income has become understandable for you. In case of any further assistance regarding tax management, please get in touch with our eCAs. We are here to help you 24×7. Happy Filing
Frequently Asked Questions
Q- What is the treatment of TDS when a minor's income is clubbed into yours?
As per rule 37BA(2) parents can file a declaration to the bank for making tax deductions in the name of the parent with whom income of the child is being clubbed. Also, there is an option in the ITR form to claim such TDS. So in all the cases for the minor’s income which is clubbed TDS for the same can be claimed by the parent.
Q- How to show clubbing of income in ITR?
As per the ITR Forms, you need to show both your income and the income to be clubbed while filing ITR. Also, an applicable schedule needs to be filed.
Q- How much money can be gifted to a wife,so that no tax is levied?
Irrespective of the amount involved there is no tax on giving a gift to your wife.
Q- Is clubbing of lossed allowed?
As per clubbing provisions given under the income tax act income includes losses. Although clubbing of losses will lead to reduction in tax payable but still if income is clubbed losses are also clubbed.
Q- What is revocable transfer of asset?
Under revocable transfer the person transferring the asset generally possesses direct or indirect control either over the asset or income generated from such asset.
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