Income Tax - Explainer on Clubbing of Income

Income Tax Basics - Clubbing Of Income

Since an assessee typically has only one income subject to taxation, some with higher incomes began transferring income to those with lower incomes inorder to avoid paying taxes.

Transfer of income without transferring assets [section 60]

When a person (the transferor) transfers his income but not his assets, the transferee will receive the income but the transferor will be the only one who must pay taxes on it.

Income from transfer of assets under revocable agreement

After the death of the transferee, a person (the transferor) who transferred assets to that person(the transferee) under a revocable trust will only be liable for tax on theincome from those assets. (No clubbing)‍

Note 1 : Income from assets transferred to spouse(excluding house property) without / inadequate consideration [section 64(1)(iv)]

If a person (the transferor) transfers any asset excluding house property to his or her spouse (the transferee) without providing reasonable consideration, the income from such assets will be subject to proportionate taxation on the transferor.

Income clubbed =Total income x Gift amount / Total value of assets

A) Income will only be combined if there is a husband-wife connection at the time of asset transfer and income generation.

B) In the following situation clubbing will not be possible.

1. Income from any assets purchased by spouse from pin (pocket money ) will not be clubbed.
2. Income from assets given to a spouse under a separation agreement won't be clubbed.
3. Any addition income on income (accretion of income) will not be clubbed.
4. There will be no clubbing of income from assets transferred to the spouse for full consideration.

C) Income from assets purchased by transferee by selling gifted assets will be clubbed with transferor.

Note 2 : Income from assets transferee to son’s wife without inadequate consideration [section 64(1)(vi)]

If a person (the transferor) transfers any assets excluding house property to his or her spouse (the transferee) without providing reasonable consideration, the income from such assets will be subject to proportionate taxation on the transferor.

Income clubbed = Total income x Gift amount / Total value of assets

Note 3 : Assets transferred to any person to any benefits of spouse /son’s wife (indirect transfer) [section 64(iv/vii)]

Any income from such assets is obtained by any other person (the transferee) if an individual transfers any assets to a person without consideration or on insufficient consideration for the interests of a son's wife or husband; however, tax on such income is paid by the transferor.

Note 4 : Income from Minor Child

Income of minor child will be clubbed with their parents (i.e. mother or father) whose comparatively income is higher).

Exception (no clubbing) - In following cases minors income will be in hands of minors only.

1. Income due to manual work
2. Income due to skill and talent.
3. Minor child suffering disability.

A) If minor child income is in the hands of parents then exemption u/s 10(32) of 1500 p.a per child is allowed to parents.

B) The term minor child includes step child & adopted child.

C) Income earned by minor child due to its own efforts and talent will not get clubbed.

Note 5 : Income earned by spouse from organization in which assessee have substantial interest [section 64(1)(i)].

The income of spouse will be clubbed with assessee if following 3 condition satisfied.

1. The assessee ought to be very interested in the organization.
2. Spouse's income is in the form of a salary, commission, or bonus.
3. Spouse should not be qualified for the job or lacks the necessary technical abilities for the organization or experience.

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