Clubbing of income refers to the practice of treating the income of one person as the income of another person for the purposes of taxation. This is usually done in cases where the income is earned by one person but is intended to benefit or be used by another person.
Here are some income tax provisions when income can be clubbed:
Section 60
Section 60 states that if a person transfers income to another person without transferring the underlying asset, the income will be taxable in the hands of the transferor. This applies when the transfer is made through an agreement or in any other way. In such cases, any income generated from the asset will be clubbed in the hands of the transferor, even if the income is received by the transferee.
Section 61
Section 61 states that if a person transfers an asset on the condition that the transfer can be revoked, any income generated from that asset will be taxable in the hands of the transferor. This means that if the transferor retains the power to revoke the transfer of the asset, then any income arising from the asset will be clubbed in the hands of the transferor and taxed accordingly.
Section 64(1A)
Section 64(1A) deals with the clubbing of income of minor children. Any income earned by a minor child, including step or adopted children, is clubbed in the hands of the higher-earning parent for tax purposes. This provision also applies to minor married daughters.
However, if the parents are divorced or separated and the child is maintained by one of the parents, then the income will be clubbed in the hands of that parent for tax purposes.
There are some exceptions to the clubbing of income of minor children, including income earned by a disabled child, income earned by a major child, and income earned from manual work or specialized knowledge and experience.
If the minor child's income is clubbed with the parent's income, the parent is eligible for an exemption of up to Rs. 1,500.
Section 64(1)(ii)
Section 64(1)(ii) deals with the clubbing of income from a concern in which the taxpayer has substantial interest, if the taxpayer's spouse receives any remuneration from that concern, irrespective of its nomenclature or mode of payment.
In such cases, the income received by the spouse will be clubbed in the hands of the taxpayer or spouse, depending on whose income is greater before clubbing. However, if the spouse possesses technical or professional qualifications and the income is solely attributable to the application of their technical or professional knowledge and experience, clubbing of income will not be attracted.
Substantial Interest:
- For Company: If the individual along with his relatives (Spouse, brother, sister or any lineal ascendant or descendant of the individual) holds not less than 20% equity shares beneficially.
- For others: If an individual along with his relatives is entitled to atleast 20% of profits
Section 64(1)(iv)
Section 64(1)(iv) deals with the clubbing of income arising from assets transferred by a taxpayer to their spouse for inadequate consideration, either directly or indirectly.
In such cases, any income arising from the transferred asset is clubbed in the hands of the transferor for tax purposes, except in cases where the asset is a house property.
However, there are some exceptions to this clubbing provision, such as if the asset is received as part of a divorce settlement if the assets are transferred before marriage if no husband and wife relationship subsists at the time of income accrual, or if the asset is acquired by the spouse out of pin money.
Section 64(1)(vi)
Section 64(1)(vi) Act deals with the clubbing of income arising from assets transferred by a taxpayer to their daughter-in-law for inadequate consideration, either directly or indirectly.
In such cases, any income arising from the transferred asset is clubbed in the hands of the transferor for tax purposes.
Section 64(1)(vii)
Section 64(1)(vii) deals with the clubbing of income arising from assets transferred by a taxpayer to any person or association of persons for inadequate consideration to benefit their daughter-in-law, either immediately or on a deferred basis.
In such cases, any income arising from the transferred asset is considered as the transferor's income and clubbed in their hands for tax purposes.
The provision is designed to prevent taxpayers from transferring assets to any person or association of persons for inadequate consideration to benefit their daughter-in-law and avoid tax liability.
Section 64(1)(viii)
Section 64(1)(viii) applies when any person or association of persons transfers any assets directly or indirectly for inadequate consideration to any person or association of persons to benefit their spouse either immediately or on a deferred basis. In such cases, any income from such assets will be considered the income of the transferor and will be clubbed in their hands.
Section 64(2)
Section 64(2) deals with the clubbing of income in the case of Hindu Undivided Families (HUF). It states that if a member of the HUF transfers his individual property to the HUF for inadequate consideration or converts such property into HUF property, then any income from such converted property shall be clubbed in the hands of the individual. This means that the income from such property will be taxed as the income of the individual and not the HUF.
Persons to club income
Section 64 specifies that only certain specified incomes of specified persons can be clubbed with the individual's total income. Not all income of all individuals can be clubbed together randomly.
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