Clubbing of Income Section 60 to 64 – Some Facts & FAQ’s

By | December 26, 2015

incometaxtips‘Diversified Income’ the word itself defines what it means. Its normal human tendency to diversified its income sources to manage the income as well as saves some taxes on it. Generally the individual does this by investing his savings in the name of his spouse or children’s. It may seem ordinary to invest money for a non earning spouse by way of fixed deposits, or other income earning assets or to set up bank accounts, mutual funds or other investments for children to provide for their needs in future and with intention to minimize the income tax liabilities. In the normal course, you are only taxed for your own income, but under some special provisions of income tax act some incomes are ‘clubbed’ along with your income and you may be liable to pay tax on such clubbed income.

The intention of the statue is very clear by inserting the clubbing provisions here is to make sure there is no tax that escapes, in case an individual is moving assets or incomes in the family. In a situation where you have incurred a loss, such loss (wherever allowed to be adjusted against an income) is also not allowed to be transferred to anyone and will be ‘clubbed’ to your income.

Let’s understand in what are those situations which may attract this ‘clubbing’ of income provisions of income tax act.

In the case of Assets Transfer to Anyone

Transfer of Income – no transfer of assets: When you retain the ownership of an asset but decide to transfer its income by doing an agreement or any other way, as per the provisions the income so transferred will still consider as your income and it will be added to your total income for taxation purposes.

Transfer of Asset – which is revocable: When you transfer the ownership of an asset and make such transfer revocable, income from such an asset will continue to be added to your income.

Clubbing of Spouse’s Income

Here are some scenarios when your spouse’s income will get added to your income and you’ll have to pay tax on it-

1.  Your spouse receives a salary, commission, sales bonus or whatever name called from a company or a firm in which you have a potential beneficial interest, then such salary, commission, sales bonus or whatever name called will be clubbed with your income. Here potential beneficial Interest means you alone or with your relatives (husband, wife, brother, sister or your lineal ascendant or descendant) hold equity or voting power of a company in excess of 20% or more. Or in case of a firm you are entitled profit or gains in excess of 20%. Also, if both of you receive an income from such a firm or company, it will get taxed in the hands of the person whose taxable income is higher.

There is one exception to this – if your spouse receives the salary, commission, sales bonus or whatever name called due to his/her application of technical or professional knowledge & experience then such salary, commission, sales bonus or whatever name called will be taxed in the hands of the person receiving it and not clubbed.

2.  You transfer an asset to your spouse directly or indirectly without receiving satisfactory consideration (does not include where asset is transferred as part of a divorce settlement) – income from such asset will be clubbed with your income.

For example – where the husband to reduce his tax liability transfers an asset worth Rs 1,00,000 to his wife for Rs 25,000. 3/4th of the income from this asset will be taxed in the hands of the husband. If he receives no consideration, in that case the entire income from this asset will be clubbed with the husband’s income.

Although the clubbing provisions here exclude house property – but in case you transfer a house property to your wife and do not receive adequate consideration, as per the Act, you will still be considered the ‘deemed owner’ and the income from the asset will be clubbed with your income.

3.  You transfer an asset to a person or an association of persons, directly or indirectly, without adequate consideration, so that the benefit arises to your spouse either now or on a deferred basis, income from such an asset will be clubbed with your income.

4.  Assume a situation where you provide money to your spouse and that money is invested by the spouse and a certain income is generated (from such money that you gave your spouse). The income that arises from such investment done by her can be clubbed to your income. However, if your spouse reinvests the income portion and earns further income then such income may not be clubbed with your taxable income.

 Clubbing of Income of Minor Child (less than 18 years old)

To manage the future major expenses and to secure the future of ones, families make fixed deposits in the name of a minor child. Income of a minor is taxable in the hands of the parent whose total income is higher (before including the minor’s income). If the parents are divorced it is clubbed with the person who is maintaining the child.

There is one exception to this rule – if the minor has earned an income because of his own manual work, or used his talent or specialized knowledge & experience OR in case of a minor who is disabled (based on definition of disability in Section 80U) and earns an income, such income will not be clubbed.

When your minor child’s income is clubbed to your income – exemption is available up to Rs 1500 or income do arise whichever is less for each such minor child under section 10.

Clubbing of Income of a Major Child

You may be giving over some money to your major child (who may not be earning), in this case if the major child invests that money – any income from these investments will not be taxable in your hands but will be taxed in the hands of the major child. So therefore, there will be no clubbing of income in case of a major child.

Clubbing of Income of a Son’s Wife

You transfer an asset to your son’s wife directly or indirectly without receiving satisfactory consideration – income from this asset will be clubbed with your income. Or you transfer an asset to a person or AOP, for the immediate or deferred benefit of your son’s wife, without satisfactory consideration, directly or indirectly – income from this asset will be clubbed with your income.

FAQs on Clubbing of Income

A.  Do any clubbing provisions exist in case of transfer of income without transfer of asset?

As per section 60, if a person transfers income from an asset owned by him without transferring the asset from which the income is generated, then the income from such an asset is taxed in the hands of the transferor (i.e., person transferring the income).

E.g., Mr. Raj has given a bungalow owned by him on rent.  Annual rent of the bungalow is Rs. 84,000. He transferred entire rental income to his friend Mr. Kumar. However, he did not transfer the bungalow. In this situation, rent of Rs. 84,000 will be taxed in the hands of Mr. Raj.

B. Do any clubbing provisions exist in case of a revocable transfer?

Revocable transfer is generally a transfer in which the transferor directly or indirectly exercises control/right over the asset transferred or over the income from the asset.

As per section 61 , if a transfer is held to be a revocable, then income from the asset covered under revocable transfer is taxed in the hands of the transferor. The provisions of section 61 will not apply in case of a transfer by way of trust which is not revocable during the life time of the beneficiary or a transfer which is not revocable during the lifetime of the transferee.

C. Can remuneration received by spouse of an individual be clubbed with his/her income?

Under certain circumstances as given in section 64(1)(ii), remuneration (i.e., salary) received by the spouse of an individual from a concern in which the individual is having substantial interest is clubbed with the income of the individual.

Illustration A

Mr. Shahrukh is beneficially holding 21% equity shares of Kolkata Knight Riders. Mrs. Shahrukh is employed as CFO in Kolkata Knight Riders at a annual salary of Rs. 2 crores. Mrs. Shahrukh is not having any knowledge, experience or qualification in the field of accountancy or finance. Will the remuneration (i.e., salary) received by Mrs. Shahrukh be clubbed with the income of Mr. Raja?

In this situation, Mr. Shahrukh is having substantial interest in Kolkata Knight Riders and remuneration of Mrs. Shahrukh is not justifiable (i.e., she is employed without any technical or professional knowledge or experience) and, hence, salary received by Mrs. Shahrukh from Kolkata Knight Riders will be clubbed with the income of Mr. Shahrukh and will be taxed in the hands of Mr. Shahrukh.

In case if Mrs. Shahrukh draws salary based on her knowledge, experience and qualification and, hence, remuneration paid to her is justifiable & no such income will be clubbed in the hands of Mr. Shahrukh.

  Can income from assets transferred to spouse without adequate consideration be clubbed with the income of transferor-spouse?

As per section 64(1)(iv), if an individual transfers (directly or indirectly) his/her asset (other than house property) to his or her spouse otherwise than for adequate consideration, then income from such asset will be clubbed with the income of the individual (i.e., transferor). Income from transfer of house property without adequate consideration will also attract clubbing provisions, however, in such a case clubbing will be done as per section 27 and not under section 64(1)(iv).  The clubbing provisions of section 64(1)(iv) will apply even if the form of asset is changed by the transferee-spouse. There are certain situations in which the  clubbing provisions of section 64(1)(iv) are not applicable (refer next FAQ for these situations).

Illustration C

Mr. A Birla holds 8,400 debentures of ABCL. He gifted these debentures to his wife. Will the income from debentures be clubbed with the income of Mr. A Birla?

In this situation, the debentures are transferred to spouse. Transfer is via gift (i.e., without any consideration) and, hence, income generated from the transferred asset, i.e., interest on such debentures will be clubbed with the income of Mr. A Birla.

If such debentures would have been transferred with adequate consideration then any income arise from such debentures would not be clubbed in the hands of Mr. A Birla.

E.  Are there any situations in which the clubbing provisions do not apply in case of income from assets transferred to spouse?

The clubbing provisions of section 64(1)(iv) are not applicable in the following situations:

  • 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;

If on the date of accrual of income, transferee is not spouse of the transferor (i.e. the relation of husband and wife does not exist).

F.  Can income from assets transferred to son’s wife without adequate consideration be clubbed with the income of transferor, i.e., father-in-law/mother-in-law?

As per section 64(1)(vi) , if an individual transfers (directly or indirectly) his/her asset to his/ her son’s wife 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). The provisions of clubbing will apply even if the form of asset is changed by the transferee-daughter-in-law.

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.

G.  Can income from assets transferred to any person for the benefit of spouse or for the benefit of son’s wife without adequate consideration be clubbed with the income of transferor?

As per section 64(1)(vii), if an individual transfers (directly or indirectly) his/her asset otherwise than for adequate consideration to a person or an association of persons for the immediate or deferred benefit of his/her spouse, then income arising from the asset so transferred will be clubbed with the income of transferor.

As per section 64(1)(viii) , if any individual transfers (directly or indirectly) his/her asset otherwise than for adequate consideration to a person or an association of persons for the immediate or deferred benefit of his/her son’s wife, then income arising from the asset so transferred will be clubbed with the income of transferor.

H.  Is minor child’s income clubbed with the income of parent?

As per section 64(1A) , income of minor child is clubbed with the income of his/her parent whose income is higher. Income of minor child earned on account of manual work or any activity involving application of his/her skill, knowledge, talent, experience, etc. will not be clubbed with the income of his/her parent. However, accretion from such income will be clubbed with the income of parent of such minor.

If the marriage of parents does not sustain, then minor’s income will be clubbed with the income of parent who maintains the minor.

In case the income of individual includes income of his/her minor child, such individual can claim an exemption under section 10(32) of Rs. 1,500 or income of minor so clubbed, whichever is less.

Provisions of section 64(1A) will not apply to any income of a minor child suffering from disability specified under section 80U. In other words income of a minor suffering from disability specified under section 80U will not be clubbed with the income of his/her parent.

I.  Will any clubbing provision apply in case of transfer of asset to Hindu Undivided Family (HUF) by its member?

As per section 64(2) , when an individual, being a member of HUF, transfers his property to the HUF otherwise than for adequate consideration or converts his property into the property belonging to the HUF (it is done by impressing such property with the character of joint family property or throwing such property into the common stock of the family), then clubbing provisions will apply as follows:

  1. Before partition of the HUF, entire income from such property will be clubbed with the income of transferor.
  2. After partition of the HUF, such property is distributed amongst the members of the family. In such a case income derived from such property by the spouse of the transferor will be clubbed with the income of the individual and will be charged to tax in his hands.

13 thoughts on “Clubbing of Income Section 60 to 64 – Some Facts & FAQ’s

  1. Prakash

    Beautifully explained. I have a query as below:
    – Mother-in-law Gifts equity shares of public limited company to her Daughter-in-law without any consideration (out of natural love and affection). As you explained, the income arising out of it (dividend, capital gains) will be taxed in the hands of mother-in-law.
    Query is: Who has the right / claim to the income arising which is being taxed in the hands of the donor. i.e. The monies received in the form of income, in this case, dividend, fully belongs to the receiver or donor ? The reason for asking is if the donor, mother-in-law passes away, then will Mother-in-law’s legal heirs have claim over the income received in that particular financial year in which mother-in-law passes away ?

    Reply
  2. Prakash

    Beautifully explained. I have a query as below:
    – Mother-in-law Gifts equity shares of public limited company to her Daughter-in-law without any consideration (out of natural love and affection). As you explained, the income arising out of it (dividend, capital gains) will be taxed in the hands of mother-in-law.
    Query is: Who has the right / claim to the income arising which is being taxed in the hands of the donor. i.e. The monies received in the form of income, in this case, dividend, fully belongs to the receiver or donor ? The reason for asking is if the donor, mother-in-law passes away, then will Mother-in-law’s legal heirs have claim over the income received in that particular financial year in which mother-in-law passes away ?

    Also, as per my understanding .. after the death of mother-in-law, the income will be taxed in the hands of the daughter-in-law. Right ? And then no legal heir of Mother-in-law will have right/claim over it.

    Reply
  3. Prakash

    Further to my query just posted… what is the meaning of “The provisions of clubbing will apply even if the form of asset is changed by the transferee-daughter-in-law” ?

    What if daughter-in-law sells the shares gifted by mother-in-law ? The capital gain arising from the sale will be taxed in the hands of mother-in-law. But once the proceeds from the sale are further invested, then the income (dividend / capital gains subsequently) arising from that will not be clubbed in mother-in-law’s income. Right ?

    Reply
  4. K Mehta

    I gift some shares held by me since morae bthan 3 years to my husband what shall be the clubbing provisions and if my husband sells these shares and invests in FD or in property will the interest/rental income be clubbed in my income.

    Reply
  5. KUSHAL KAD

    TAX GURU SIR
    MY WIFE IS GRADUATE AND PARTNER WITH THE FIRM WITH ME , MY SON AND SON’S WIFE (B-TECH). REMUNERATIONS GIVEN TO PARTNERS ARE NOT EQUAL BUT GIVEN TO THEM ARE ACCORDING TO DUTIES AND MUTUALLY AGREE. THE SAME IS WRITTEN IN PARTNERSHIP DEED BEFORE THE START OF YEAR. MY WIFE GIVEN 96000 PA, MYSELF TAKES 36000 PA, MY SON GIVEN 195000 PA, MY SON’S WIFE GIVEN 180000 PA.
    WILL THE INCOME OF WIFE’S BE CLUBED IN HUSBAND INCOME. PLEASE ANS

    Reply
  6. Manoj Kumar

    A person attains the age of superannuation 60 years on 31st January’17 . Now while furnishing IT return for FY 2016-17 can he claims the benefit of senior citizen?

    Reply
    1. TaxGuru Post author

      Yes. If a assessee reach to the age of 60 years during any day of the previous is eligible to get the benefit of senior citizen rebate.

      Reply
  7. Praveen

    Under Clubbing of Spouse’s Income point number 4 – How long should i club “provided money” under husbands income? Say my wife reinvests the entire money again and again and again. Even then i get to club income from reinvested “provided money” under my name?

    Reply
  8. Pranav Rathi

    My client’s husband is expired in March 2016, in the year 2016-17 all the sources of income were transferred to my client as the legal successor of the deceased but there is a Tax Credit in form 26 AS of the deceased for FY 2016-17, how can I claim it..?

    Reply
    1. TaxGuru Post author

      Hi Pranav,

      The IT return for the year 2016-17 shall be filed as representative assessee by you client and then claim TDS part as well. From FY 2017-18 all the income of deceased tax payment will be clubbed with your clients income and return will be filed accordingly.

      Reply
  9. SUNDARAMOORTHY

    Dear tax guru sir
    I am a salaried employee having taxed income and want to invest one portion of it to my spouse name in a bank ie FD so as to give her financial security even though my spouse is separate assessee and doing business. The FD earns certain interest on her,in this case the FD interest is treated as the income earned by me or my wife. In whose IT file it id to be shown rightly.Kindly advice me in this regard.

    Reply
    1. TaxGuru Post author

      Amount to investment done in the name of spouse is chargeable to tax in the hand of giver if there is no consideration received. Now in your case you want invest the surplus in FD’s in your wife name……so the interest portion will be taxable in your hands.

      Reply

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