Clubbing of income: What it is, how it works, and everything else you need to know about saving tax.

You must be giving some money to your spouse regularly or investing in various financial products in your minor child's name. While you can continue transferring money to your spouse or investing in your minor child's name, you need to remember that the money transferred or invested will be clubbed with your income. In this article, we will understand what is clubbing of income and the various related provisions.

What is the clubbing of income?

There are certain instances in which the income of another person(s) is included in the taxpayer's income. And in such cases, the taxpayer is liable to pay income tax on their income and the income of another person(s). Such a situation where the income of another person(s) is included in the taxpayer's total income is known as clubbing of income.

Sections 60 to 64 of the Income Tax Act deal with the clubbing of income and its various related provisions. Let us look at each of these.

1) Section 60: Transfer of income where there is no transfer of assets

Let’s assume an individual transfers income from an asset without transferring the asset itself. In such a case, all the income arising from the asset shall be included in the transferor's income. It doesn't matter whether the income transferred is revocable or not or whether the income transfer has been done before or after the commencement of the Income Tax Act.

For example, Karan owns a car, which he has given out for a monthly rent of Rs 10,000. Karan transfers the monthly rent to Vijay without transferring the car ownership. In this case, the monthly rent will be added to Karan's total income even though he transfers it to Vijay. The monthly rent will be taxed in the hands of the transferor (i.e. Karan) in this case.

Also Read: Income Tax In India: An Interesting History

2) Section 61: Revocable transfer of assets

A revocable transfer is one in which the transferor exercises control or right over the asset transferred or over the income from the assets transferred. The control or right may be direct or indirect.

As per Section 61, in the case of a revocable transfer of an asset, the income arising from the asset will be taxed in the hands of the transferor. For example, Karan transfers the ownership of his car to Vijay, with the condition that Vijay will transfer the car ownership back to Karan after one year. Such a transfer is a revocable transfer. Vijay gives the car for rent for one year. In this case, the rent received by Vijay will be added to Karan's total income and taxed accordingly.

As per Section 62, the provisions of Section 61 shall not apply to any income arising to any person from a transferred asset if the asset transfer has been done by way of a trust which is not revocable during the lifetime of the beneficiary or the lifetime of the transferee.

3) Section 64: Clubbing of income of spouse

Suppose an individual has a business with substantial interest (has more than 20% shareholding) and is paying their spouse an income in the form of salary, fees, commission, etc. In this case, the spouse's income will be added to the individual's income if the spouse does not possess any technical or professional qualifications.

However, if the spouse is technically qualified, and the income earned is solely attributable to the application of the spouse’s technical or professional knowledge and experience, then the above clubbing of income provision will not apply.

For example, Dinesh owns a 25% equity stake in ABC Private Ltd. Sheetal (Dinesh’s wife) works in ABC Private Ltd. as a Manager and draws a monthly salary of Rs 50,000. However, Sheetal doesn’t have the required knowledge, experience, or qualification for the job. 

In this case, Dinesh owns more than a 20% equity stake in ABC Private Ltd. Also, Sheetal doesn’t have the required knowledge, experience, or qualification for the job. So, in this case, Sheetal’s monthly income of Rs 50,000 will be clubbed with Dinesh’s total income.

Clubbing provision applicable on transfer of assets

If an individual transfers an asset to their spouse without adequate consideration, then the income from such an asset will be clubbed with the income of the individual (transferor).

Manoj had bought debentures of ABC Private Ltd. Later, he transferred the debentures to his wife Rashmi as a gift. In this case, Manoj has transferred the debentures to Rashmi (spouse) without consideration (as a gift). Hence, the income on debentures received by Rashmi will be clubbed with Manoj’s income. 

In the above scenario, the clubbing of income provision will not apply:

• If the asset transfer is with adequate consideration
• If the asset transfer is connected to an agreement to live apart
• If the asset transfer has been done before marriage, the clubbing of income provision will not apply. The husband-wife relation should exist at the time of asset transfer and at the time of income accrual.

Also Read: What Are The Special Income Tax Benefits For Women?

4) Section 64: Clubbing of income of the minor child

As per the provisions of Section 64(1A), the income of a minor child will be clubbed with their parent’s income. The minor child’s income will be clubbed with the income of the parent whose income (excluding the minor child’s income) is higher. Under Section 10(32), the parent can claim an exemption of Rs 1500 or the clubbed income of the minor child, whichever is less.

If the minor child suffers from any disability that is specified under Section 80U of the Income Tax Act, the clubbing of income provisions of Section 64(1A) will not apply. And if the parents are divorced, the minor child’s income will be clubbed with the income of the parent who is maintaining the minor child.

If the minor child has earned the income on account of manual work or any activity involving the application of their skill, knowledge, talent, experience, etc., the clubbing of income with parent provision will not apply. However, if any income is earned over the child's income, this income accretion will be clubbed with the income of the minor child's parent.

For example, Tina has two minor children, Kavita and Naveen. Kavita is a child artiste, and Naveen suffers from a medical condition specified under Section 80U of the Income Tax Act. Tina's husband Varun doesn't have any income. Now imagine the following scenarios:

• Kavita earned Rs 50,000 for her dance performance
• Kavita’s savings account earned an interest of Rs 2000
• Naveen’s fixed deposit earned an interest of Rs 1200

In this case, the income of minor kids will be clubbed with Tina’s income as her husband Varun doesn’t have any income source. Kavita earned Rs 50,000 based on her dance skill. Hence, Kavita’s Rs 50,000 income will not be clubbed with Tina’s income. Kavita’s savings account interest of Rs 2000 has been earned on her income of Rs 50,000. So, this income of Rs 2000 will be clubbed with Tina’s income.

Naveen suffers from a medical condition specified under Section 80U of the Income Tax Act. Hence, his income (fixed deposit interest) of Rs 1200 will not be clubbed with Tina’s income.

Tina can claim exemption on the kids’ income clubbed or Rs 1500, whichever is less. In this case, Tina can claim an exemption of Rs 1500 on Kavita’s income of Rs 2000 that will be clubbed with her income. So, the net income that will be clubbed with Tina’s income will be Rs 500 (Rs 2000 interest on the savings account minus Rs 1500 maximum exemption).

The above provisions don’t apply to the clubbing of income of major children.

Also Read: 6 Income Sources That Do Not Attract Tax

Should you transfer money to your spouse or invest in your child’s name?

There is no harm in transferring money or assets to your spouse without consideration or investing in your child's name. You must be doing this with good intentions, keeping their best interests in mind. However, when you do the money transfers, ensure that you are aware of the clubbing of income provisions. You will need to club the income derived from these income transfers with your income and do your ITR filing accordingly.

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.