Chapter 7 Clubbing of Income

Chapter 7
Clubbing of Income
Clubbing of Income
i. Under the Income Tax Act 1961, a person must pay income taxes. While computing the gross total
income, if the income of any other person in a family is included, then it is called Clubbing of Income.
ii. Sections 60-64 of the Income Tax Act,1961 deals with clubbing of income. Clubbing of income ensures
that taxpayers do not evade their tax liability by transferring their incomes and assets within the family.

Clubbing of income

General Provisions Specific Provisions

1. Section 60 1. Section 64
2. Section 61 2. Section 64(1A)
3. Section 62
4. Section 63

General Provisions
1. Clubbing of Income for Transfer of Income Without Transfer of Asset (Sec. 60)
Section 60 is applicable if the following conditions are satisfied:
 The taxpayer owns an asset
 The ownership of the asset is not transferred by him.
 The income from the asset is transferred to any person under a settlement, or agreement.
Note: If the above conditions are satisfied, the income from the asset will be taxable in the hands of the
transferor.

Example: Mr. A confers the right to receive rent regarding his house property on his wife, Mrs. A, without
transferring the house to her. In this case, the rent received by Mrs. A will be clubbed with the income of Mr.
A.

2. Clubbing of Income for Revocable Transfer of Assets (Sec 61)

Definition of revocable transfer (Section 63)
a. Revocable transfer, means the transferor of the asset assumes a right to re-acquire asset or
income from such an asset, either whole or in parts at any time in the future, during the lifetime
of the transferee.

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b. It also includes a transfer which gives a right to re-assume power of the income from an asset
or asset during the lifetime of the transferee.

If the following conditions are satisfied section 61 will become applicable.

 An asset is transferred under a “revocable transfer”,
 The transfer for this purpose includes any settlement, or agreement
Then any income from such an asset is taxable in the hands of the transferor and not the transferee (owner).

Exceptions to section 61(Section 62)

 Where the income arises to any person by virtue of transfer by way of trust which is not revocable.
during the life time of the beneficiary, and in case of any other transfer which is not revocable during
the life time of the transferee.
 Where the income arises to any person by virtue of transfer made before 01.04.1961, which is not
revocable for the period of 6 years or more.
Specific Provisions
Clubbing of Income of Spouse (sec 64(1) (ii))

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Note:

1. No clubbing of income if spouse possesses technical or professional qualification; and

2. Income attributable to his or her technical or professional knowledge and experience.

1. Clubbing of Income of Son’s wife (sec. 64(1) (vi))

a. Income on the asset transferred by an individual to son’s wife without adequate consideration
shall be clubbed in the hands of the transferor.
b. The relationship must exist both at the time of transfer and accrual of income.

2. Clubbing of income of AoP to which asset is transferred for the benefit of spouse (sec 64(1)(vii))
and/ or son’s wife (sec 64(1)(viii))
Income from an asset to a person or an AoP (Trust) without adequate consideration for the immediate
or deferred benefit of his / her spouse or his son’s spouse shall be clubbed in the hands of the transferor.

Clubbing of Income of a Minor Child

General Rule: The income of the minor child including a minor married daughter shall be clubbed with the
income of the parent having the greater income (excluding minor’s income).

Exception to the rule:

1. Minor child suffering from disability specified u/s 80U shall furnish return in his / her own name.
2. Income earned by minor child on account of manual work or activity involving application of his skill,
talent shall not be clubbed. But if such money is invested and income is earned on the investment that
income shall be clubbed.

Clubbing of income if

Marriage of parents subsist Marriage of parents does not exist

In the hands of the parent whose Total Income In the hands of the parent who maintains
(excluding income of the minor) is greater. the minor child in the PY

Note: Exemption least of two u/s 10(32)

1. Actual income of minor clubbed in the
hands of assessee.
2. Rs 1,500

Note: Of none of the parent is alive, minor shall file return through legal guardian. There shall be no clubbing
and the minor shall file return in his own name.

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Income from self-acquired property converted to joint family property Section 64(2)
Where an individual, who is a member of HUF: -
a) Converts, his separate property as the property of HUF, or
b) Throws the property into common stock of HUF, or Without adequate consideration
c) Otherwise transfer his individual property to the family

Then the income earned from such property shall continue to be included in the total income of the
individual.

Some common points

1. Income is to be clubbed but income on income is not to be clubbed.

2. Income includes negative incomes or losses.

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Graded Illustrations

Illustration 1: State in whose income the following income will be included:

i. M transferred Rs 5,000 to his daughter-in-law in 2017 without any consideration. She received Rs
12,000 as interest on this amount during the previous year.
ii. R transferred his self-acquired property to the HUF, of which he is a member. During the PY 2019-20
the HUF earned income of Rs 42,000 from this property.
iii. R transferred his self-acquired property to the HUF of which he is a member. The HUF earns an income
of Rs,42,000 p.a. During the PY 2019-20 the HUF is partitioned and property is divided as under:
R 1/5th share
R’s minor son 1/5th share
R’s major son 1/5th share
Mrs. R 1/5th share
R’s brother 1/5th share

iv. R transferred debentures worth Rs 5,00,000 to his wife on 1-4-2015. The debentures carry an interest
of 12% p.a. R accumulates the interest of Rs 60,000 per annum, which she receives on the debentures.
The accumulated amount of interest of Rs 1,80,000 is invested in a fixed deposit with a bank and Mrs.
R receives interest amounting to Rs 15,000 on this FDR.

Solution:

i. Rs 12,000 shall be taxable in the hands of M.

ii. Income from HP shall be taxable in the hands of R.
iii. Amount of taxed in the hands of R
Particulars Amount Amount
R’s own share (42,000/5) 84,00
Mrs. R’s share 84,00
R’s minor son’s share 84,00
(Less) Exemption u/s 10(32) (1500) 69,00
Total Income 23,700

iv. Interest on debentures amounting to Rs 60,000to be taxable in the hands of R and interest on FDR
amounting to Rs 15,000 shall be taxable in the hands of Mrs. R.

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Illustration 2: Mr. Arun holds shares carrying 55% voting power in MNO (P) Ltd. Mrs. Anamika, wife of Mr.
Arun is working as a computer software programmer in MNO (P) Ltd. at a salary of ₹ 35,000 p.m. She is,
however, not qualified for the job. The other income of Mr. Arun & Mrs. Anamika is ₹ 7,30,000 & ₹ 4,20,000,
respectively. Compute the gross total income of Mr. Arun and Mrs. Anamika for the A.Y.2024-25.

Illustration 3: Mrs. Komal transferred her immovable property to TPS Co. Ltd. subject to a condition that out
of the rental income, a sum of ₹ 42,000 per annum shall be utilized for the benefit of her son’s wife. Mrs.
Komal claims that the amount of ₹ 42,000 (utilized by her son’s wife) should not be included in her total
income as she no longer owned the property. Examine with reasons whether the contention of Mrs. Komal is
valid in law.

Solution: The clubbing provisions under section 64(1)(viii) are attracted in case of transfer of any asset, directly
or indirectly, otherwise than for adequate consideration, to any person to the extent to which the income from
such asset is for the immediate or deferred benefit of son ‘s wife. Such income shall be included in computing
the total income of the transferor-individual. Therefore, the income of ₹ 42,000 meant for the benefit of the
daughter-in-law is chargeable to tax in the hands of the transferor i.e., Mrs. Komal in this case. Hence, the
contention of Mrs. Komal is not valid in law.

Illustration 4: Mr. Arvind has three minor children – two twin daughters, aged 12 years, and one son, aged 16
years. The income of the twin daughters is ₹ 2,500 p.a. each and that of the son is ₹1,200 p.a. Mrs. Avani (wife
of Mr. Arvind) transferred her flat to her minor son on 1.4.2023 out of natural love and affection. The flat was
let out on the same date and the rental income from the flat is ` 10,000 p.m. Compute the income, with respect
to minor children, to be included in the hands of Mr. Arvind and Mrs. Avani under section 64(1A) assuming
that Mr. Arvind’s total income is higher than Mrs. Avani’s total income, before including the income of minor
children and both Mr. Arvind and Mrs. Avani exercised the option of shifting out of the default tax regime
provided under section 115BAC(1A).

Solution:

Particulars ₹ ₹
Twin minor daughters [` 2,500 × 2] 5,000
Less: Exempt under section 10(32) [` 1,500 × 2] 3,000 2,000

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Minor son 1200
Less: Exemption under section 10(32) would be lower of ` 1200 Nil
1200, being the income of minor son or ceiling limit of `
1500
Income to be clubbed in the hands of Mr. Arvind 2,000

Note – As per section 27(i), Mrs. Avani is the deemed owner of the house property transferred to her minor
son. Natural love and affection do not constitute adequate consideration for this purpose. Accordingly, the
income from house property of ` 84,000 [i.e., ` 1,20,000 (-) ₹ 36,000, being 30% of ₹1,20,000) would be taxable
directly in her hands as the deemed owner of the said property. Consequently, clubbing provisions under section
64(1A) would not be attracted in respect of income from house property, owing to which exemption u/s 10(32)
cannot be availed by her.

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