Clubbing of Income – Section 60 to 65 | Taxation for CA Intermediate PDF Download

Introduction to Clubbing of Income

 The Indian Income Tax Act of 1961 contains rules that prevent individuals from avoiding taxes by shifting their earnings to family members like spouses or minor children. These regulations, known as the clubbing of income provisions, are detailed in sections 60 to 65 of the Income Tax Act. 

What is Clubbing of Income?

 Clubbing of income involves adding one person's earnings to another individual's taxable income. The objective is to thwart tax avoidance schemes where individuals try to lower their tax burden by transferring income to their relatives. 

Applicability of Clubbing of Income

 The rules for clubbing of income come into play in various situations, including: 

• Income from assets transferred to a spouse: If an individual transfers assets to their spouse without adequate consideration, any income generated from those assets is taxable in the hands of the transferor.
• Income from assets transferred to a minor child: When assets are transferred to a minor child, the income arising from those assets is typically clubbed with the income of the parent who has the higher taxable income.
• Income from assets transferred for the benefit of a spouse or child: If assets are transferred for the immediate or deferred benefit of a spouse or child, any income derived from those assets is taxable in the hands of the transferor.
• Settled or transferred assets providing immediate or deferred benefits: If assets are settled or transferred for the immediate or deferred benefit of the transferor's spouse or child, any income generated from those assets is taxable in the hands of the transferor.
• Income Clubbing Rules:
• If an individual transfers their income to their spouse, either directly or indirectly, the transferred income will be combined with the individual's income.
• When a minor child earns income that is transferred to another person, such as a parent, the income is added to that parent's income.
• The income earned by a son's spouse or daughter's spouse can be added to the individual's income.
• When an individual transfers an asset to their spouse without adequate consideration, the income generated from that asset will be included in the transferor's income.

Exceptions to Income Clubbing

• There are specific exceptions to the income clubbing rules:
• Gifts: Income from gifts received by the spouse is not clubbed with the individual's income.
• Income from assets transferred before marriage: If assets were transferred to the spouse before marriage, the income from those assets may not be clubbed.
• Income from self-acquired property: Income generated from self-acquired property of the spouse is not usually clubbed.
• Income from assets transferred for adequate consideration: If assets are transferred to the spouse for adequate consideration, the income from those assets might not be clubbed.

Income from Assets Transferred under Specific Conditions:

• If an asset is transferred under a valid agreement where the transferor relinquishes control over the income, the income generated will not be combined with the transferor's income.
• For instance, if a property is legally transferred to a trust where the original owner no longer has any say over the generated income, that income remains separate from the transferor's earnings.

Income from Assets Transferred Pre-Marriage or for Spousal Benefit:

• When assets are transferred before marriage or for the spouse's benefit, the income from these assets won't be amalgamated with the transferor's income.
• For example, if stocks are gifted to a spouse before marriage and any dividends earned from those stocks belong solely to the spouse, they are not combined with the giver's income.

Income from Assets Transferred to Minor Children:

• Income from assets transferred to a minor child for their benefit is not clubbed with the transferor's income.
• For instance, if a savings account is opened for a minor child by a parent, any interest earned on that account is considered the child's income, not the parent's.

Consequences of Amalgamating Income

When income is combined under these circumstances, it becomes part of the recipient's total income for tax purposes. The tax obligations are then calculated based on the recipient's overall income, which includes the amalgamated income. This measure is in place to prevent individuals from transferring their taxable income to family members in lower tax brackets to reduce their tax burden.

Section 64: Clubbing of Income of Spouse, Minor Child, etc.

The Indian Income Tax Act, 1961, contains several provisions (Sections 60 to 65) that address the clubbing of income from certain relatives, such as a spouse or minor child, with the taxpayer's income. These provisions aim to prevent tax evasion by individuals who might transfer income to family members in lower tax brackets to reduce their overall tax liability. Each section covers specific scenarios and relationships as follows:

Section 60 - Transfer of Income without Transfer of Assets:

• This section applies when an individual transfers income to another person without transferring the underlying asset generating that income. The income from such transfers is deemed to be the income of the transferor and is taxable in their hands.

Section 61 - Transfer of Income with Revocable Transfer of Assets:

• This section pertains to situations where the transferor retains the right to revoke the transfer of assets. In such cases, the income generated from the transferred asset is taxed in the hands of the transferor.

Section 62 - Income of Spouse:

• Section 62 addresses the clubbing of income of a spouse. It applies when an individual transfers income-generating assets to their spouse. The income from such assets is included in the income of the individual who made the transfer and is taxed accordingly.

Section 63 - Income of Minor Child:

• This section deals with the clubbing of income of a minor child with that of their parent(s). Any income earned by a minor child from assets transferred directly or indirectly by the parent(s) is included in the parent's income and taxed accordingly.

Section 64 - Income of Other Persons to be Included in Assessee's Income:

• Section 64 covers a broader category, including not only the spouse and minor child but also any other person. It applies when income is transferred directly or indirectly to specified relatives for the benefit of the taxpayer's spouse or minor child. The income is included in the taxpayer's income who made the transfer.

Section 65 - Income of Revocable Transfer:

• This section addresses revocable transfers of assets, where the transferor has the power to revoke the transfer. The income generated from such revocable transfers is taxed in the hands of the transferor.

When an Individual is Assessable in respect of Remuneration of Spouse [Section 64(1)(ii)]

Section 64(1)(ii) applies if the following conditions are met:

• The taxpayer is an individual.
• The taxpayer has a substantial interest in a concern.
• The taxpayer's spouse is employed in this concern.
• The spouse is employed without any technical or professional knowledge or experience.

When calculating an individual's total income, any income received by the spouse (e.g., salary, commission, fees, or other remuneration) from a concern where the individual has a substantial interest will be included in the individual's income. This applies whether the remuneration is in cash or kind.
Therefore, any remuneration earned by a spouse from a concern in which the other spouse has a substantial interest will be included in the income of the spouse with the substantial interest. Other types of income are not subject to this section and will not be included, even if they accrue to the spouse from such a concern.

No Clubbing if Remuneration is Due to Technical or Professional Qualifications

The provisions of this clause shall not apply to any income arising to the spouse:

• on account of technical or professional qualifications possessed by the spouse, and
• the income is solely attributable to the application of his/her technical or professional knowledge or experience.

For example, if X is a partner in a partnership firm with a 50% share of the profits and Mrs. X is employed as the General Manager with a salary of Rs. 25,000 per month, the taxable salary of Mrs. X will be included in X's total income under "Income from salaries." However, if Mrs. X's salary is due to her technical or professional qualifications, it will not be included.

Where Both Husband and Wife Have Substantial Interest and Both Receive Remuneration:

If both spouses have a substantial interest in the concern and both receive remuneration, the income of both will be included in the income of the spouse with the higher total income, including such remuneration. This will be done for the first time in the previous year when:

• Both spouses have a substantial interest in the concern.
• Both spouses receive remuneration from the concern.
• They are married at the time the income accrues.

Once this income is included in one spouse's income, it will continue to be included in subsequent years unless the Assessing Officer decides otherwise after giving the spouse an opportunity to be heard.

Meaning of Substantial Interest

An individual is considered to have a substantial interest in the concern if certain conditions are met, which are detailed in the relevant provisions of the Income Tax Act.

Once clubbing is done in the hands of X, the salary of both X and Mrs. X will continue to be included in X's income in subsequent years, even if X's income is lower than Mrs. X's in a particular year. The Assessing Officer can only shift the clubbing to Mrs. X's income if they are satisfied that it is necessary, and this can only be done after giving Mrs. X an opportunity to be heard.

How to Compute Salary, Commission, Fee, or Any Other Remuneration

For the purpose of clubbing under Section 64(1)(ii), salary must be computed according to the provisions of Sections 15 to 17. Similarly, commission, fees, or any other form of remuneration must be computed after allowing relevant deductions for calculating such income.

When an Individual is Assessable in respect of income from Assets Transferred to the Spouse [Section 64(1)(iv)]

Section 64(1)(iv) applies if the following conditions are met:

• The taxpayer is an individual.
• The taxpayer has transferred an asset (excluding house property).
• The asset is transferred to the taxpayer's spouse.
• The transfer may be direct or indirect.
• The asset is transferred either (a) without adequate consideration, or (b) not in connection with an agreement to live apart.
• The asset may be held by the spouse in its original form or in a different form.

If these conditions are satisfied, any income generated from such an asset will be deemed to be the income of the taxpayer who transferred the asset.

When computing an individual's total income, any income that arises directly or indirectly to the spouse from assets (excluding house property) transferred to the spouse without adequate consideration or not in connection with an agreement to live apart shall be included, subject to the provisions of Section 27(1) (deemed owner).

According to this provision, if an individual transfers any asset other than house property to their spouse, the income from that asset will be included in the total income of the transferor. This provision does not apply to house property because, in that case, the transferor is deemed to be the owner of the property, and the annual value of the property is taxed in the transferor's hands as per Section 27.

Where a house property is transferred by an individual to his or her spouse, although the transferor shall be the deemed owner of the house property and shall be subject to tax under the head ‘income from house property’ but if there is any capital gain on the transfer of such house property, such capital gain shall first be computed in the hands of the transferee and thereafter the same will he clubbed with the income of the transferor as per provisions of this section, i.e., section 64(1)(iv).

Income from transferred assets will not be clubbed in the following cases:

• The transfer is for adequate consideration.
• The transfer is under an agreement to live apart.

The relationship of husband and wife does not exist either at the time of the transfer or at the time the income accrues. For example, if A gifts an asset to his fiancée (future wife), the income from the gift will not be taxed in A's hands even after their marriage because the husband-wife relationship did not exist at the time of the gift. Similarly, if A gifts an asset to his wife and later divorces her, the income arising after the divorce will not be clubbed.

Note:

If A makes a gift to his fiancée, and the gift exceeds Rs. 50,000, it will be taxable in the fiancée's hands as "income from other sources" under Section 56(2)(x).

• If a wife acquires property using an allowance given by her husband for personal expenses (called pin money), the clubbing provisions do not apply.
• If the transferred asset changes its form, the income from the changed asset will be clubbed. For example, if the original gift was shares, and the spouse sold the shares to acquire a house that is then rented out, the rental income from the house will be clubbed with the transferor's income.

When an Individual is Taxed for Income from Transferred Assets to Spouse (Section 64(1)(iv))

Section 64(1)(iv) applies when the following criteria are met:

• Condition 1: The taxpayer is an individual.
• Condition 2: Transfer of an asset (excluding a house property) by the individual.
• Condition 3: Transfer of the asset to the individual's spouse.
• Condition 4: The transfer can be direct or indirect.
• Condition 5: The asset transfer is not for adequate compensation or in relation to an agreement to live separately.

Any income which arises from assets transferred directly or indirectly by an individual to his son’s wife after 1.6.1973, otherwise than for adequate consideration, shall be included in the income of the transferor. For example, R transfers 1,000 10% bonds of Rs.100 each of IDBI to his son’s wife without any consideration. 1DB! declares U 0,000 as interest. Although the sum of U 0,000 as interest is received by his son’s wife, this amount shall be included in the income of R under the head ‘Income from Other Sources’ for the purpose of computing his total income.

When an Individual is Assessable in respect of Income from Assets Transferred to a Person for the Benefit of Spouse [Section 64(1)(vii)]

Section 64(1)(vii) applies if the following conditions are met:

• Condition 1: The taxpayer is an individual.
• Condition 2: The individual has transferred an asset.
• Condition 3: The transfer may be direct or indirect.
• Condition 4: The asset is transferred to a person or an association of persons.
• Condition 5: The transfer is for the immediate or deferred benefit of the individual's spouse.
• Condition 6: The transfer is without adequate consideration.

If these conditions are satisfied, the income from the asset, to the extent of the benefit, is taxable in the hands of the individual who transferred the asset.

When an individual transfers assets to any person or association of persons without adequate consideration, the income from these assets shall be included in the income of the transferor to the extent that it benefits the transferor's spouse, whether immediately or in the future. For instance, if X transfers a house to his friend Y, directing that 50% of the rental income benefits his wife Mrs. X and 50% benefits others, then 50% of the rental income shall be included in X's total income.

When an Individual is Assessable in respect of Income from Assets Transferred to a Person for the Benefit of Son’s Wife [Section 64(1)(viii)]

Section 64(1)(viii) applies if the following conditions are met:

• Condition 1: The taxpayer is an individual. 
• Condition 2: He/she has transferred an asset after May 31, 1973. 
• Condition 3: The asset is transferred to any person or an association of persons. 
• Condition 4: Transfer may be direct or indirect. 
• Condition 5: The asset is transferred for the immediate or deferred benefit of his/her son’s wife. 
• Condition 6: The asset is transferred otherwise than for adequate consideration. 

If these conditions are satisfied, the income from the asset, to the extent of the benefit, is included in the income of the individual who transferred the asset.

When an individual transfers assets after June 1, 1973, to any person or association of persons without adequate consideration, the income from these assets shall be included in the income of the transferor to the extent that it benefits the transferor's son's wife, whether immediately or in the future.

When an Individual is Assessable in respect of Income of his Minor Child [Section 64(1A)]

When calculating an individual's total income, the income earned or accrued by their minor child is included in the parent's income. This means the minor child's income is combined with the income of either parent.

The income should be combined with the parent who has the higher total income (excluding the child's income). If the parents are separated, the income is combined with the parent who maintains the child during the previous year.

Once the minor child's income is included in one parent's income, it cannot be included in the other parent's income in subsequent years unless the tax authority allows it after a hearing.

The parent whose income includes the minor child's income is eligible for an exemption up to the child's income or ₹1,500, whichever is less, for each minor child.

Certain incomes of a minor child are taxable only in the child's hands:

• Income of a minor child with a disability specified in section 80U (e.g., physically disabled, blind).
• Income from any work done by the minor child.
• Income from activities involving the child's skills, talent, or specialized knowledge.

Additional Points:

• "Child" includes stepchildren and adopted children (Section 2(15B)).
• Section 64(1A) does not exclude minor married daughters, so their income is also combined. However, if Section 27 applies, income from property gifted by a parent is not combined.
• If both parents are deceased, the minor's income is not combined with the guardian's income. The guardian must file the minor's return, but it won't be included in the guardian's income if the guardian is not a parent.
• If the minor child reaches majority during the year, their income up to that date is combined with the parent's income.

Income from Self-Acquired Property Converted to Joint Family Property

When an individual who is a member of a Hindu Undivided Family (HUF):

• Converts personal property to HUF property,
• Throws personal property into the family's common stock, or
• Transfers personal property to the family without adequate consideration,

the income from such property remains part of the individual's total income. For example, if X owns a house earning ₹6,00,000 per year and converts it to HUF property, the income, although received by the HUF, is still included in X's total income under 'Income from House Property'.

Implications of Subsequent Partition:

If the converted property is partitioned among family members, the income from the partitioned property received by the spouse is considered income indirectly transferred by the individual to the spouse. This income is combined with the transferor's income. For instance, if X's family partitions the property equally, the income distribution is as follows:
(a) Income from X's share: ₹1,20,000
(b) Income from Mrs. X's share: ₹1,20,000 (combined with X's income)
(c) Income from the minor child's share: ₹1,20,000 (combined with the higher-earning parent’s income, with a ₹1,500 exemption under Section 10(32))
(d) Income from the major children's shares: Taxed individually in their hands

Important Notes

Income is to be Clubbed but income on income is not to be Clubbed:

• It may be observed that under all the provisions discussed above, what is to be clubbed is the income arising from the assets transferred. However, the income derived on the accretion of such property or from the accumulated income from such property cannot be clubbed. For example, X transfers 10,000 bonds of IDBI to his wife Mrs. X. Mrs. X receives interest of Rs.70,000 per annum on the bonds.
• This amount of Rs.70,000 is to be clubbed in the hands of Mr. X. However, if Mrs. X accumulates Rs.50,000 out of the interest income and deposits it with the company at an interest of 10% per annum then the interest of Rs.5,000 per annum received by her on the deposit will not be clubbed in the income of Mr. X.

Income includes Loss:

• For the purpose of section 64, income includes loss. Therefore, under all the provisions discussed above, where the income arising to one person is to be clubbed in the hands of another person, in the event of loss, the loss shall be taken into account in computing the income of such person.

Under which head of Income will the Clubbed Income be Assessed

As per the discussed provisions, the income of another individual should be included in the total income of the individual. However, this income will initially be calculated as if it were the recipient's income. The recipient will calculate this income under the relevant category, taking into account any exemptions, allowances, or deductions allowed under that category. This computed income, falling under the relevant category, will then be added to the individual's total income under the same category.

Evaluation of Consolidated Income

According to the Indian Income Tax Act of 1961, Consolidated Income is assessed under the category "Income from Other Sources." This category encompasses income not classified under any other specific category and is taxable as per the provisions of the act.

When considering consolidated income, there are specific scenarios where it applies, outlined in Sections 60 to 64 of the Indian Income Tax Act, 1961. Let's delve into these scenarios:

Income Transfer without Asset Transfer (Section 60)

• In this scenario, if an individual transfers their income to another person without transferring the underlying assets, that income is combined with the transferor's income. This provision prevents individuals from transferring income to avoid tax obligations.

Revocable Asset Transfers (Section 61)

• If assets are transferred to another person but the transfer can be revoked, the income generated from those assets is combined with the transferor's income. This prevents temporary asset transfers to avoid taxes on the income they generate.

Asset Transfer for Spousal Benefit (Section 64)

• Under this section, if assets are transferred directly or indirectly to a spouse, with the primary intent of benefiting the spouse, the income from those assets is combined with the transferor's income. This prevents asset transfers to spouses to reduce tax liabilities.

It's essential to note that consolidated income is taxed at the transferor's applicable tax rates. This income is added to the transferor's total income and taxed accordingly. The purpose of consolidating income is to ensure that income is taxed for the person who earns it.