The Income Tax Department has recently released a new brochure highlighting how clubbing of income provisions is applicable for individual taxpayers. Clubbing of income refers to the situation in which your wife’s or child’s or other person’s income is included in your total income and accordingly taxed. Under the Income Tax Act, 1961 income will be clubbed in the hands of either the husband or wife whose total income is higher

Ramakrishnan Srinivasan, former chief commissioner of Income Tax Department says: ""Many taxpayers are not aware of the clubbing provisions of Income Tax Act, 1961 and accordingly land up getting slapped with huge tax demand for arranging their financial affairs with their relatives. One such case which I remember was about a taxpayer who gave cash gift to his spouse and she invested it in fixed deposit in her name and offered interest income in her income tax return. The tax department applied the clubbing provisions and taxed the interest income in the hands of the husband. Similarly in another case, a salaried employee opened a fixed deposit (FD) in the name of his minor daughter out of his savings and did not offer the interest income in his hands thinking that interest is getting accumulated in his daughter’s account without realizing the clubbing provisions of Income Tax Act, 1961. The tax department brought the said income to tax in the hands of the employee and also levied stiff penalty on the ground under reporting of income which amounts to misreporting."

What is clubbing of income?

According to the income tax brochure, clubbing of income refers to including another person’s income in the taxpayer’s total income under certain circumstances as per the Income Tax Act, 1961. This is done to prevent tax evasion by transferring income to another person. The provisions of clubbing of income are applicable only to individuals and no other type of assessee like firm/HUF/Company, etc.

“Clubbing of income refers to a situation where a person is taxed for the income earned by another person. Under specific conditions, the income earned by other individuals (spouse, minor child, etc) is added to the income of the taxpayer.

Why clubbing of income is done?

The Income Tax Department introduced these provisions to ensure people don’t reduce their taxable income by transferring it to family members in lower tax brackets.

What are the key provisions under clubbing of income?

According to the Income Tax Department brochure here are the key provisions under clubbing of income:

Section 60: Transfer of income without transfer of assets

If a person transfers income to another person without transferring the asset, the income will still be taxable in the hands of the transferor.

Section 61: Revocable transfer of assets

Any income from an asset that can be transferred back to the taxpayer at any point in time is considered a revocable transfer, and the income is taxable in the hands of the transferor.

Section 64(1)(ii), 64(1)(iv), 64(1),(vii): Income of spouse

If an individual transfers any asset to their spouse, not under an agreement to live apart, the income generated from that asset will be clubbed with the transferor’s income.

Section 64(1)(vi), 64(1)(viii): Income from Assets transferred to Son’s wife

Income from assets transferred to the son’s wife, either directly or indirectly, is taxable in the hands of the transferor.

Section 64(1A): Income of a minor child

The income of a minor child is clubbed with the income of the parent whose income is higher. Exceptions are provided for income earned by the minor from manual work or specialised knowledge, etc

Section 64(2): Income from HUF

If a taxpayer converts individual property into a Hindu Undivided Family (HUF) or transfers property to an HUF without adequate consideration, the income from such a property is clubbed with the taxpayer’s income.

Exceptions to clubbing of income

According to the Income Tax Department brochure here are the details:

1. Income from personal skill or manual work: Income earned by a spouse through personal skill or manual work is not subject to clubbing.
2. Income of a minor child: The income of a minor child on which clubbing applies can be reduced by an exemption of Rs 1,500 per child, as provided under Section 10(32).
3. Income of spouse from independent funds: If the spouse earns income from assets acquired out of their independent funds, such income is not clubbed.

Tax implications of clubbing of income

The clubbed income is taxed at the applicable rates of the taxpayer in whose hands it is included. This can result in a higher tax liability, especially when income is transferred to individuals in lower tax brackets. 

“Understanding the provisions of clubbing of income is essential to avoid unintentional tax evasion and penalties. Proper planning and compliance with these rules ensure smoother tax filing and legal tax-saving opportunities,” said the Income Tax Department.

"Appreciate CBDT for coming out with a brochures to enlighten taxpayers of consequences of not complying with this provision while filing returns," says Srinivasan.

Income from asset transferred to your daughter-in-law will be clubbed to your income and will be taxable in your hand?

Chartered Accountant Aastha Gupta, S.K. Gulati and Associates, says: "If an individual transfers (directly or indirectly) his/her asset to his/ her son's wife (daughter-in-law) otherwise than for adequate consideration, then income from such asset will be clubbed with the income of the individual (i.e., transferor being father-in-law/mother-in-law).

"Gupta says, "However, there is a catch to above. If the asset is transferred before marriage of son, no income will be clubbed even after marriage, since the relation of father-in-law/mother-in-law and daughter-in-law should exist both at the time of transfer of asset and at the time of accrual of income. If on the date of accrual of income, the relation of father-in-law/mother-in-law and daughter-in-law does not exist, then the provisions of clubbing will not apply.

Chartered Accountant Ashish Karundia explains that an important point regarding the exception mentioned above is that if the asset (say immovable property) is gifted by the future in-laws to the son’s prospective wife, then the clubbing provisions may not get triggered. "However, the stamp value of the immovable property itself may become taxable at the time of receipt of such gift (except when such gift is on the occasion of marriage) in the hands of the said woman (daughter-in-law) under section 56(2)(x) of the Income-tax Act, 1961. The said income needs to be reported as ‘income from other sources’ in the tax return and due taxes need to be paid."

Source: Income Tax Department Brochure

When is wife's income clubbed with husband's and vice-versa?

• Gupta says:If you transfer an income-generating asset to your spouse without proper compensation, any income from this asset will still remain taxable in your hand

• If your spouse works in an organisation where you own any substantial stake (around 20 per cent or more), their salary could be clubbed with your income unless they have the necessary professional or technical qualifications professional or technical qualifications for the said job/role

• If the transfer of asset is for adequate consideration;
• If the transfer of asset is in connection with an agreement to live apart;
• If the asset is transferred before marriage, no income will be clubbed even after marriage, 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.