Clubbing Of Income Under Section 64 of Income under Income Tax Act

What is Clubbing of Income in Income Tax Act?

When the income of another person is included in your income and taxed in your hands, then such a 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 to 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 a salary income worth Rs 2,00,000 & rental income of Rs 1,00,000. With an 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

When will Provisions of Clubbing of Income be Applicable?

There are different scenarios under which the 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 transfers the income without transferring the ownership of the asset from which such income is earned, then, such income will be taxable in the hands of the transferor. The most popular example that we see is the rental income when the owner of the property asks his tenant to make the rental payments in his/her parent’s/wife’s or children's name.

Let us explain to you with a simple example: Ashish owns a house in Jaipur and is earning a rental income of Rs 20,000 p.m. on this. But, in order to save tax, he asked his tenant to make rental payments in his wife's bank account. In this case, though the income is received in the wife's account, it will be taxed to Ashish as he transferred the income source without transferring the legal ownership of the house.

People often make this mistake while planning their taxes. So, remember to transfer the legal ownership of the asset before transferring the income next time. Our Tax Advisory Service can help you avoid such mistakes and do foolproof tax planning.

Revocable Transfer of Asset [Section 61]

When a person transfers an asset to another person, keeping a clause in the transaction empowers the transferor to take back the ownership anytime in the future. Such a situation is called Revocable Transfer. As per provisions of Clubbing of Income, when a “revocable transfer” of an asset is made, then any income from that asset shall be taxable in the hands of the transferor. [Transferor: a person who transfers the asset. Transferee: a person who receives the asset.]

For instance, Karan transferred his house property to Arjun. There is a condition in the agreement that the 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 the case of the 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 below.

1. Your spouse works in a concern/entity in which you have a substantial interest. There are two aspects of this situation, 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 the profits of the firm. Your wife is employed in the same firm as a general manager and getting Rs 20,000 p.m. due to her professional capacity, so 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.

2. 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 the hands of that spouse whose income excluding such remuneration is higher. However, as per the common view, if both spouses are earning remuneration due to their professional competence, then provisions of clubbing shall not apply.
   Note: Substantial interest means when you are entitled to 20% or more share of profits (in case of a firm) or not less than 20% voting power (in case of a company) at any time during the year.
3. 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 where,
   A . the asset is transferred for adequate consideration or,
   B. as a condition of divorce or,
   C. it was transferred before marriage.
4. The nature of the transferred gift is changed by the transferee: Sometimes, it is seen that a gift transferred that was not taxable previously is further invested in a source such that it starts yielding income. In all such instances where the transferee spouse changes the nature of the asset, provisions of section 64(1)(iv) are attracted, and income clubbing occurs.
   Example:
   Mr. Sharma gifted his wife Rs 5,00,000. The wife invests this amount in an FD and starts earning interest on the same. Will this interest income be taxable in Mr Sharma's hands?
   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 the asset transferred has been changed by the transferee, i.e., Mrs. Sharma.
5. 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.

Clubbing of Income in case of Son’s Wife [Section 64(1)(vi),64(1)(viii)]
Clubbing of income provisions also applies in case of any transfer of income made to your daughter-in-law. The situation is discussed below.
The asset has been transferred to your daughter-in-law without any proper consideration. In this case, any income generated 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.

The 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, in 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 -

1. When a minor child is suffering from any disability, as mentioned in Sec 80U, or
2. When income is earned by a minor child through manual work, or
3. Income earned by the minor child through his skill, talent, knowledge, etc. For e.g., a minor child wins money on TV shows like Indian Idol Junior winner, Voice India Kids, etc.

Moreover, an exemption of Rs 1500 is provided u/s 10 (32) on income earned by each minor child to the parent under which the minor’s income is being clubbed.

Do not forget to claim this exemption.

Clubbing of Income of Major Child

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 governed by the principles applicable to an individual up to 60 years of age. So, if your major child earns income above Rs 2,50,000 (before any deduction), he is liable to file his income tax return. No clubbing of income provisions shall apply.

A situation might arise where the child was a minor but attained the status of major in the same financial year. In such a case, income would be clubbed until such a child was minor and not for the remaining part of the year.

Clubbing of Income & HUF [Section 64(2)]

The existence of the Hindu Undivided Family has been for ages. Income Tax provisions also recognize HUF as an assessee. In simple terms, a HUF is also liable to file an income tax return. Hence, it’s obvious that clubbing of income provision is also attracted in the case of HUF.
If any of your personal assets have been transferred to the HUF without any adequate consideration, In such cases, all income from such assets shall be taxed in your hands.
In case of the split of HUF in the future, the distributed property in your spouse's hands will be clubbed with your income. For example, you have a house from which you earn a rental income of Rs 5,00,000 p.a. When you transfer this house to HUF without consideration or inadequate consideration, then the income of Rs 5,00,000 will be taxed in your hands only.

Conversion of Self-acquired Property into Joint Ownership

When an individual's self-acquired property is transformed into joint family property without adequate consideration, the income generated by the joint family from that property becomes part of the total income attributable to the joint family.

If an individual who is a member of the HUF:

• Converts their separate property of the HUF,
• Integrates the property into the common stock of the family, or
• Transfers their individual property to the family,

and does so without receiving adequate consideration, the income derived from such property will be included in the total income of that individual. This inclusion ensures that any income arising from the conversion or transfer of self-acquired property into joint family property is accounted for in the relevant tax assessments.

In which Cases Clubbing of Income is not Applicable?

Income transferred before marriage:
Any asset or gift given to the would-be wife before the wedding will not be considered under the clubbing provisions. Since the relationship of husband and wife should exist both at the time of transfer of assets and at the time of accrual of income.

Income derived from clubbed income:
Except in the case of a minor, when the asset is transferred to a spouse or daughter-in-law (son’s wife), any further income derived from the income generated shall not be clubbed. For e.g., Mr. X transferred an amount of Rs 5,00,000 to his wife. This amount is invested in a 10% FD; thus, the interest of Rs. 50,000/- will be taxable in the 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 the wife only.

Saved money is not considered 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 the income tax department can nab your income using clubbing of income provisions. But like it’s said, “where 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 has no income then you can save income up to Rs 2,50,000. However, 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 an exemption of house rent allowance. Also, if your parents do not earn any other income, they can claim further benefits. They will fall within the basic exemption limit and will have to pay less income tax.

Health insurance of family members:
You can further claim a deduction u/s 80D by getting health insurance for your family. The maximum deduction that can be claimed is Rs 25,000 for an individual and his/her spouse and children. When you pay a premium for your parents, who are senior citizens, then the maximum deduction will be Rs 50,000. Further, the deduction can be claimed for medical expenditures incurred by senior citizen parents. It is within the limit of Rs 50,000

Prefer Loan over gift:
You can give your spouse a 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 modes like banking channels. This will shift the tax liability in your spouse's hands, and no clubbing would be done. However, it must be analyzed 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 the 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 gifts to relatives, which is again tax-free.

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 in the name of your wife; rental income from such house, say Rs 50,000, will be clubbed, but if the house is in the name of your wife, then the 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 an EEE product) in your spouse's or minor child's name, then as the maturity proceeds of PPF are tax-free, you will enjoy tax-free income. The same applies to equity products.

Also, the amount can be gifted to senior citizen parents, major children, or earning spouses 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 the residential property, then it will be taxed under Income From House Property. Likewise, in a 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 the return form 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 a minor, therefore, his income will be clubbed with Mr. Happy’s income. Now Mr. Happy has to file his return in form ITR 2. If there had been no “lottery income” for his minor son, then he’d have used the 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.