Explore the nuances of Clubbing of Income under Section 64 in our latest blog. Uncover key insights on how this tax provision impacts income attribution, ensuring a comprehensive understanding of its implications for individuals and businesses.
The Indian Income Tax Act, of 1961, aims to ensure fairness and prevent tax evasion. One key tool in achieving this is the clubbing of income under Section 64. This provision allows the income of one person to be added to the income of another person for tax purposes, thereby preventing the artificial splitting of income within a family or other close-knit group to reduce tax liability.
In layman’s terms, clubbing of income means that the income earned by a specified person, instead of being assessed in their own hands, is added to the income of another specified person, usually with higher income, for tax calculation. This effectively pushes the combined income into a higher tax bracket, leading to a higher tax liability.
Who Can Be Clubbed?
Section 64 specifies the individuals whose income can be clubbed under various scenarios. These include:
- Minor Children: Income earned by a minor child, except income from scholarships and stipends, is clubbed with the income of the parent whose total income (excluding the child’s income) is higher.
- Spouse: Income earned by a spouse from a firm or entity in which the other spouse holds a substantial interest (20% or more voting power in a company, for example) can be clubbed with the spouse with the higher income.
- Income Transferred without Adequate Consideration: Income arising from assets transferred by an individual to another person without adequate consideration (e.g., gifting an apartment to a son) can be clubbed with the transferor’s income.
- Income from Trust or Partnership: Income from a trust created by an individual for the benefit of specified persons (spouse, children, etc.) or income from a partnership where the individual has control can be clubbed with the individual’s income.
Exceptions and Reliefs
While clubbing provisions aim to prevent income splitting and tax evasion, certain exemptions and reliefs offer some leeway. These include:
- Exemption for Savings from Investments: Income earned by a minor from investments made out of bona fide gifts from relatives other than parents is not clubbed.
- Exemption for Specified Assets: Income from assets acquired by a spouse through inheritance or specific gifts from parents is not clubbed.
- Minimum Income Threshold: Income earned by a minor child below a certain threshold (currently Rs. 1,500 per annum) is not clubbed.
Consequences of Clubbing:
Clubbing of income can have significant consequences for both the transferor and the transferee. For the transferee, their taxable income increases, potentially pushing them into a higher tax bracket and leading to a higher tax liability. For the transferor, they may lose certain tax benefits or exemptions that apply to specific types of income.
Planning Strategies:
To minimize the impact of clubbing, taxpayers can adopt certain strategies, such as:
- Gifting Assets with Adequate Consideration: Transferring assets with adequate consideration, such as fair market value, can avoid income clubbing.
- Investing in Exempt Assets: Investing in assets that qualify for exemptions, such as gifts from parents or specific investments for minors, can help avoid clubbing.
- Income Splitting within Allowable Limits: Taxpayers can explore legal income splitting options within family members, such as through salary sharing between spouses, to optimize tax liability.
| Section | Specified Person | Specified Scenario | Income to be Clubbed |
| Section 60 | Any person | Transferring income without transferring assets either by way of an agreement or any other way | Any income from such asset will be clubbed in the hands of the transferor |
| Section 61 | Any person | Transferring an 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 the child includes both stepchild and adopted child. The clubbing provisions apply even to a minor married daughter. | Income will be clubbed in the hands of the higher-earning parent. |
| 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 the parent, then an exemption of Rs. 1,500 is allowed to the parent. 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 specialized 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 ‘relatives’. | ||
| 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 a substantial interest* | Income shall be clubbed in the hands of the taxpayer or spouse, whose income is greater (before clubbing). The exception to clubbing: Clubbing is not attracted if the spouse possesses technical or professional qualifications 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 assets is clubbed in the hands of the transferor. Provided the asset is other than the house property. Exceptions to clubbing: – Where the asset is received as part of a divorce settlement – If assets are transferred before marriage – No husband and wife relationship subsists on the date of accrual of income – 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) |
| Section 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 |
| Section 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 a deferred basis | Income from such assets will be considered as your income and clubbed in your hands |
| Section 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 a deferred basis | Income from such assets will be considered as your income and clubbed in your hands |
| Section 64(2) | Hindu Undivided Family (HUF) | 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 the individual |
Examples:
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Minor Child’s Income:
- Scenario: Mr. Sharma’s 10-year-old son, Rohan, has a fixed deposit in his name that earns an annual interest of ₹25,000. Mr. Sharma’s total income is ₹8 lakhs, while his wife’s income is ₹6 lakhs.
- Clubbing: The interest income of ₹25,000 will be clubbed with Mr. Sharma’s income as he has a higher total income. So, his taxable income becomes ₹8,25,000.
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Spouse’s Income from a Firm:
- Scenario: Mrs. Gupta is employed in a company where her husband owns 30% of the shares. She receives a salary of ₹4 lakhs per annum.
- Clubbing: Mrs. Gupta’s salary will be clubbed with her husband’s income as he has a substantial interest in the company.
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Income from Transferred Assets:
- Scenario: Mr. Mehta gifted a property to his wife without any consideration. The property generates a rental income of ₹15,000 per month.
- Clubbing: The rental income from the property will be clubbed with Mr. Mehta’s income as he transferred the asset without adequate consideration.
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Income of a Partner in HUF:
- Scenario: Mr. Arora is the Karta of a Hindu Undivided Family (HUF). His minor daughter is also a partner in the HUF. The HUF earns a business income of ₹5 lakhs, of which ₹1 lakh is attributable to the daughter’s share.
- Clubbing: The ₹1 lakh share of the daughter’s income will be clubbed with Mr. Arora’s income as the Karta of the HUF.
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Income of a Controlled Foreign Company:
- Scenario: Ms. Singh holds a 60% stake in a company incorporated in a foreign country. The company earns a profit of ₹10 lakhs in the financial year.
- Clubbing: Ms. Singh may be required to club the foreign company’s income with her income as she holds substantial control over the CFC.
Conclusion
The clubbing of income provisions under Section 64 is an essential tool for promoting tax fairness and discouraging tax evasion. Understanding the scope and limitations of this provision is crucial for both taxpayers and tax professionals. By ensuring its proper application, the Indian income tax system can strive towards a more equitable and efficient tax regime. Consult with our Vakilsearch tax advisor to understand the specific implications of clubbing and plan accordingly.
FAQs
What is Clubbing of income under Section 64?
Clubbing of income refers to adding the income of another person to one's income for tax purposes. Under Section 64 of the Income Tax Act, 1961, certain situations arise where income earned by specific individuals is included in the total income of another individual.
Who can be subject to Clubbing of income?
Income of five categories of individuals can be clubbed under Section 64:
- Minor child: The income of a child below 18 years is clubbed with the parent having a higher total income.
- Spouse: Income from a firm where the individual or their relatives hold at least 20% voting power.
- Partner of a HUF: Income of a minor or dependent relative partner, except the Karta.
- Individuals transferring assets without adequate consideration: Income from assets gifted to spouse, minor child, son's wife, or daughter's husband.
- Individuals with income from controlled foreign companies: Income from a CFC where the individual holds substantial control (50% or more voting power).
Are there any exceptions or exemptions to Clubbing?
Yes, some exceptions and exemptions exist:
What are the implications of Clubbing of income?
Clubbing can lead to:
What strategies can I use to minimize the impact of Clubbing?
Consider these strategies:
