Document

AI Summary to Minimize your effort

Index

Clubbing Of Income Under Section 64

Updated on: Apr 14th, 2024

6 min read

There are many occasions when you may require to club income of someone else with your income. If you are planning to transfer any of your assets/income to another person as a means of tax planning to avoid the income getting taxed in your hands, hold on. Such transfers could result in attraction of clubbing provisions under the Indian income tax laws.

Even genuine gifts extended to your kith and kin could have these income tax implications. It will help you immensely if you get some insights on the clubbing provisions under the Indian income tax law. Hence, let us understand these provisions a little more in detail.

Clubbing of Income

As the term suggests, clubbing of income means adding or including the income of another person (mostly family members) to one’s own income. This is allowed under Section 64 of the IT Act. However, certain restrictions pertaining to specified person(s) and specified scenarios are mandated to discourage this practice.

Specified Persons to Club Income

Income of any and every person cannot be clubbed on a random basis while computing total income of an individual and also not all income of specified person can be clubbed. As per Section 64, there are only certain specified income of specified persons which can be clubbed while computing total income of an individual.

Specified Scenarios to Club Income

Section	Specified person	Specified scenario	Income to be clubbed
Section 60	Any person	Transferring income without transferring asset either by way of an agreement or any other way,	Any income from such asset will be clubbed in the hands of the tranferor
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 where child includes both step child and adopted child. The clubbing provisions apply even to minor married daughter.	Income will be clubbed in the hands of higher earning parent. Note: If the marriage of the 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 a minor child’s income is clubbed in the hands of parent, then an exemption of Rs. 1,500 is allowed to the parent (This is applicable only if the parent opts for the old tax regime). 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 the application of his skill and talent or specialised 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 nomenclature, 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 substantial interest*	Income shall be clubbed in the hands of the taxpayer or spouse, whose income is greater (before clubbing). An exception to clubbing: Clubbing is not allowable if 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**	Direct or indirect transfer of assets to your spouse by you for inadequate 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 of income in the following cases: a. Where the asset is received as part of divorce settlement b. If assets are transferred before marriage, c. No husband and wife relationship subsists on the date of accrual of income. d. The asset is acquired by the spouse out of pin money (i.e. an allowance given to the wife by her husband for her personal and usual household expenses)
64(1)(vi)	Daughter-in-law	Transfer of assets transferred directly or indirectly to your daughter in-law by you for inadequate consideration	Any income from such assets transferred is clubbed in the hands of the transferor
64(1)(vii)	Any person or association of person	Transferring any assets directly or directly for an inadequate consideration to any person or association of persons to benefit your daughter in-law either immediately or on deferred basis	Income from such assets will be considered as your income and clubbed in your hands
64(1)(viii)	Any person or association of person	Transferring any assets directly or directly for an inadequate consideration to any person or association of persons to benefit your spouse either immediately or on 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

*An individual is said to have the substantial interest in the concern if–

In case of a company, individual either by himself or along with his relative/s beneficially owns shares having 20% or more voting power (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits)
In any other case, such individual either alone or along with his relative/s is entitled to 20% or more of profits in the aggregate of such concern at any time during the previous year.

**Income from reinvestment of clubbed income by a spouse is not clubbed in the hands of individual.

Examples on Clubbing of Income

Example 1
Mr P owns a shop which fetches a rent of Rs.12,000 per month. He transfers the rent to his friend Mr Q but retains the ownership of the shop.

In this case, because Mr P has transferred the income without transferring the asset. Hence, as per section 60 of the income tax act, Mr P must include the rental income while computing his total income.

Example 2
Mr Jay is beneficially holding 21% equity shares of PTK Pvt. Ltd. Mrs Jay is employed as a finance manager in PTK Pvt. Ltd. The monthly salary received from Mrs PTK Pvt. ltd. is Rs. 40,000. Mrs Jay is not having any qualification, experience or knowledge of finance.

In this situation, Mr Jay has a substantial interest in PTK Pvt. Ltd. with 21% shareholding. But Mrs Jay is employed without any qualification and technical knowledge of finance. Hence, salary or payment received by Mrs Jay from PTK Pvt. Ltd. will be clubbed with the income of Mr Jay as per section 64(1)(ii) of the income tax act.

In the above case, if Mrs Jay had the qualification and knowledge for the finance manager post in PTK Pvt. ltd., then income earned by Mrs Jay will not be clubbed in the income of Mr Jay.

Example 3
Mr Lucky holds gifted Rs. 6,00,000 to his wife. Mrs Lucky has then invested the same amount in the fixed deposit. Mrs lucky receives the interest of 5,000 p.a. from such fixed deposit.

As Mr Lucky has transferred Cash (asset) without adequate consideration and it was converted into another asset by Mrs Lucky. Hence, interest earned of Rs. 5,000 from the converted asset (fixed deposit) will be clubbed in the income of Mr Lucky as per section 64(1)(iv) of the income tax act.

Note:

If Mr lucky transfers the cash as a settlement for divorce in the above case, then clubbing provisions will not apply.
Also, if he transfers the cash before marriage and interest is accrued after marriage, no income shall be clubbed in the hands of Mr. Lucky.

Hence, husband-wife relationship should remain at the time of transfer of asset and also at the time of accrual of income.

How to avoid Clubbing of Income ?

Now we have explained the provision where transaction which are considered under clubbing of income , Let's explain some of unique ways you can plan your taxes without clubbing of Income provision

Transfer of amount to Parents and Interest earned on such investment : Any amount transferred to your Parents as a Gift will not be taxable in the hands of your Parents and lets say such amount is invested in a Fixed Deposit , Interest on such FD will continue to be taxed in the hands of Parents and clubbing provision will not be applicable
Gift Received at the time of Marriage : Any gift received during the time of marriage will not be taxable in the hands of the recipient and thus any income arising on such investment will continue to be taxed in the hands of the recipient.
Investment in PPF : Since interest earned on PPF is exempt income , Even if you invest in PPF in the name of your Spouse or Minor child , Interest will not be taxable. Thus clubbing provision became irrelevant.

Since there is an investment cap of Rs 150,000 per individual in PPF , You can open multiple PPF accounts in the name of your Spouse or Minor child to get this benefit.

Things To Remember

The clubbing provision applies to Income and loss both.
Capital gain on further transfer of the asset by the transferee will be considered as income and it shall be clubbed in the income of transferor.
The income derived from the converted form of asset shall be clubbed in the hands of transferor.
If part consideration is payable or paid, then only the inadequate consideration will be clubbed in the hands of the transferor
The clubbing provisions will not apply on the income derived from the clubbed income.

For example: If a bond is transferred for Rs. 5 lakh to the spouse or daughter-in-law without adequate consideration and interest of Rs. 20,000 on such bond is clubbed in the hands of the transferor. However, if the spouse or daughter-in-law further earns any income from such interest of Rs. 20,000, no clubbing provisions shall apply on such income.

The clubbing provisions will apply for indirect transfers or cross transfers as well.

For example: If Mr K gifts a sum of Rs. 8,000 to Mrs. N and Mr. N gifts a sum of Rs. 15,000 to Mrs. K. Say both the gifts are without any consideration. Then the overlapping amount of Rs. 8,000 will be clubbed in the hands of the transferors.

Disclosure in ITR Form

Any individual having income as per provision of Section 60 to 64 due to clubbing provision then specific disclosure needs to be provided. It is important to note that Individual taxpayers will have to use ITR -2 /3 if they have any income to be considered under clubbing provision.

Such income which is accrued in the name of Spouse , Child or other individual which is subject to clubbing provision needs to be declared in Total Income (In respective head of income) and separate disclosure is required in Schedule SPI in the below ITR Format

Related Articles

Clubbing of Investment Limits Under FPI Regulations

Frequently Asked Questions

Is there a clubbing provision applicable when there is transfer of income without transfer of asset?

Yes, as per section 60, such income is taxed in the hands of the transferor.

Are any clubbing provisions applicable in case of a revocable transfer?

Yes, in case of revocable transfer, section 61 makes the income taxable in the hands of the transferor only.

What is clubbing of income under section 64 of Income Tax Act?

Clubbing income provision was introduced as a mechanism so individual cannot avoid payment of taxes by way of transferring of income or assets to another Individual with substance i.e Transfer of income without transfer of asset , Recovacable transfers , Transfer of asset to spouse etc

How to avoid clubbing of income ?

In the following cases clubbing of income provision will not be applicable

Transfer of amount to Parents and Interest earned on such investment
Gift received during the marriage
Investment in PPF’

How to show clubbing of income in ITR form ?

If you have income subject to clubbing provision then your need to file ITR-2 / 3 and fill Schedule SPI disclosing such clubbed income.

What is the treatment of TDS when spouse or minor income clubbed in your Hands ?

Where the income of spouse or minor child income which is subject to TDS is clubbed in your hands. Thus you have two option

Submit declaration with the Bank or Person paying such Income : Based on such declaration the deductor shall deduct the TDS and credit such TDS to your PAN instead of your spouse or minor child. This is the most ease process since at year end , Income you declare and TDS credit appearing in Form 26AS will match
Transfer of TDS Credit : In case you have missed to provide such declaration at the time of filing of ITR As per rule 37BA(2) , You can transfer out the credit from your spouse and Transfer in the TDS credit to your ITR. Details of such transfer in and out needs to be provided in Schedule TDS of your ITR form by providing the PAN of such individuals.

Quick Summary

Clubbing of income under Indian tax law requires adding another person's income to one's own. Specified persons and scenarios restrict clubbing. Parents, children, spouses, Hindu Undivided Families have specific clubbing provisions. Exceptions exist for disabled children, adult children's income. Ways to avoid clubbing include gifting to parents, PPF investments, gifts at marriage. Clubbing applies to both income and losses. ITR form disclosure needed for clubbing income.