Clubbing of Income

What is Clubbing of Income?

 Clubbing of income means including the income of any other
person in the assessee’s total Income. The Income Tax Act has
specified certain cases where the income of one person is
statutorily required to be included in the income of another
person if some conditions are satisfied. This inclusion is known
as Clubbing of Income.
 For example , if a husband diverts some part of his income to
his wife to reduce his tax burden, then such transferred income
of a wife is added and taxed as income of husband only and not
his wife.
Transfer of Income without transfer of Asset
[Sec 60]
Section 60 is applicable if the following conditions are
satisfied –
 The Taxpayer owns an assets.
 The ownership of assets is not transferred by him.
 The Income from the assets is transferred to any person
under a settlement, or agreement.
If the above conditions are satisfied, the income from the
assets would be taxable in the hands of the transferor.

 Example– Mr. Bachan confers the right to receive rent in

respect of his house property to his friend Mr. Khan,
without transferring the house itself to him. In this case,
the rent received by Mr. Khan will be clubbed with the
income of Mr. Bachan.
Revocable transfer of Assets [Sec
61]
Revocable transfer means the transferor of assets assumes
a right to re-acquire the asset or income from such an
asset, either whole or in parts at any time in future, during
the lifetime of transferee/beneficiary.
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.
Exceptions to Section 61:
 Where the income arises to any person by virtue of
transfer by way to trust which is not revocable during the
life time of the beneficiary, & 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 (Sec 62).

 It also includes a transfer which gives a right to re-

transfer or re-assume power over the asset or income
from the asset, regardless of whether this right has been
exercised or not (Sec 63).
Examples: Section 60 & 61

X owns 4,000 14% debentures of A Ltd. of Rs. 100 each

(annual interest being Rs. 56,000). On April 1, 2022, he
transferred interest income to Y, his friend, without
transferring the ownership of these debentures.
 Although, during 2022-23, interest of Rs. 56,000 is
received by Y, it is taxable in the hands of X, as he has
transferred income without transferring the ownership of
the asset.

X transfers a house property to a trust for the benefit of A

and B. However, X has a right to revoke the transfer during
the lifetime of A and or/B.
 It is a revocable transfer and income arising from the
house property is taxable in the hands of X.
Examples: Section 61
X transfers an asset on March 31, 1961. It is revocable on or
before June 6, 1963.
 It is a revocable transfer. Income arising from the asset is
taxable in the hands of X.
Conversely, if X transfers an asset before April 1, 1961, and
is revocable after 6 years (say on April 10, 1967), it is not
taken as a revocable transfer.

X transfers an asset. Under the terms of transfer, he has the

right to use the asset for the personal benefits of his family
members whenever he wants. Till date, he has not
exercised this right.
 It is a revocable transfer. The entire income from the
asset would be taxable in the hands of X.
Remuneration of Spouse [Sec 64 (1)
(ii)]
The following incomes of spouse of an individual shall be
included in the total income of the Individual: Remuneration
from a concern in which spouse has substantial Interest.
 Concern– Concern could be any form of business or
professional concern. It could be a sole proprietor,
partnership, company etc.
 Substantial Interest– An individual is deemed to have
substantial interest, if he/she beneficially holds equity
shares carrying not less than 20% voting power or is
entitled to not less than 20% profits at any time during
the previous year.
Remuneration of Spouse [Sec 64 (1)
(ii)]
If the following conditions are fulfilled this section [64(1)(ii)]
becomes applicable:
 If spouse of an individual gets any salary, commission, fees
etc (remuneration) from a concern.
 The Individual has a substantial interest in such a concern.
 The remuneration paid to the spouse is not due to technical
or professional knowledge of the spouse.
Then such remuneration shall be considered as income of the
individual & not for the spouse.
 When both husband & wife have substantial Interest:
Where both the husband & wife have substantial interest in
a concern & both are in receipt of the remuneration from
such concern, both the remuneration will be included in the
total income of husband or wife whose total income
excluding such remuneration is greater.
Example: Section 64(1)(ii)
X holds 20 per cent equity share capital in Y Ltd. Mrs. X is
employed by Y Ltd. (salary being Rs. 1,40,000 per month) as
general manager (Finance). She does not have any
professional qualifications to justify the remuneration.
Ascertain in whose hands salary income is chargeable to
tax. Does it make any difference if Mrs. X was employed by
Y Ltd. even prior to her marriage.

 In this case, X has substantial interest in Y Ltd. Where

Mrs. X is employed. Mrs X does not have any professional
qualification to justify the remuneration of Rs. 1,40,000
per month. Her salary income of Rs. 16,30,000 (Rs.
1,40,000 X 12 – Standard deduction : 50,000) will be
taxable in the hands of X.
 It does not make any difference even if Mrs. X was
employed by Y Ltd. prior to her marriage.
Do it Yourself
Mrs. X holds 5 per cent equity share capital in A Ltd. Her
brother and sister hold about 18 per cent equity share
capital in A Ltd. with effect from January 31, 2022.
X is employed by A Ltd. during 2022-23 on monthly salary of
Rs. 95,000 as a deputy accountant.
He does not have any professional qualification. Ascertain
in whose hands salary income is chargeable to tax.

 Mrs. X who (along with her brother and sister) holds

substantial interest in the company will be taxed for the
remuneration of her husband as he does not have any
professional qualification.
Illustration :Section 64(1)(ii)
1. X and Mrs. X hold 20 % and 30 % equity shares in C Ltd.
respectively. They are also employed in C Ltd. (monthly salary
being Rs. 80,000 and Rs. 40,000 respectively) without any
technical/professional qualification.
Other incomes of X and Mrs. X are Rs. 1,60,000 and Rs. 1,90,000
respectively. Find out the net income of X and Mrs. X for the
assessment year 2023-24.

 X and Mrs. X have substantial interest in C Ltd. which employs

them without any professional/ technical qualification. In this
case, the salary of husband and wife shall be included in the
income of Mrs. X whose other income is higher as explained
under-
 X
Mrs. X
Salary of X (80,000 X 12 – 50,000) -
9,10,000
Income from Asset transferred to Spouse [Sec
64(1)(iv)]
Income from assets transferred to spouse becomes taxable
under provision 64(1)(iv) as per following conditions:
 The taxpayer is an individual.
 He/She has transferred (directly/indirectly) an asset (other
than a house property**).
 The asset is transferred to his/her spouse.
 The asset is transferred without adequate consideration.
 Moreover, there is no agreement to live apart.
If the above conditions are satisfied any income from such
asset shall be deemed to be the income of the taxpayer who
has transferred the asset.

** If a house property is transferred without adequate

consideration, then the transferor is “deemed” as owner of
the property u/s 27.
When section 64(1)(iv) is not applicable:
 If assets are transferred before marriage
 If assets are transferred for adequate consideration
 If on the date of accrual of income, the transferee is not
the transferor’s spouse.
 If assets are transferred in connection with an agreement
to live apart.
 If the spouse acquires property out of pin money (i.e. an
allowance given to the wife by her husband for her dress
& usual household expenses.)

 Example- Mr. B transfer 500 debentures of IFCI to his wife

without adequate consideration. Interest Income on these
debentures will be included in the Income of Mr. B.
Illustration: Section 64(1)(iv)
2. X and Y form a partnership firm on April 1, 2022 (profit sharing ratio is 2:3)
by investing Rs. 10 lakh and Rs. 15 lakh respectively. The investment has
been financed from the following sources:
X Y
Gift from Mrs X 6,60,000 -
Gift from Mrs. Y - 8,00,000
Past savings of X and Y 3,40,000 7,00,000

 For the year ending March 31, 2023, share of profit from the firm is as
follows-
Interest on Capital @ 12% 1,20,000 1,80,000
Salary as working partner 24,000 24,000
Share of Profit 1,08,000 1,62,000
 Find out the income taxable in the hands of X and Mrs. X
 Solution:
X
Mrs. X
Share of Profit (exempt under section 10 (2A)** Nil
-
Salary from the firm 24,000
-
Interest on Capital (1,20,000 X 6.6 lakh/10 lakh) 40,800
79,200
64,800
79,200

**The profit of a firm is taxed in the hands of the firm. However, the
partner’s share in the total profit of the firm is exempt from tax in the
hands of the partners as per section 10(2A) of the Act.
Do it Yourself
Find out the income taxable in the hands of Y and Mrs. Y

Answer: Y: 1,08,000
Mrs. Y : 96,000
Do it Yourself
 Mr. P owns a shop which fetches a rent of Rs.12,000 per
month. He transfers the rent to his friend Mr. Q but
retains the ownership of the shop.
 In this case, because Mr. P has transferred the income
without transferring the asset. Hence, as per section 60
of the income tax act, Mr. P must include the rental
income while computing his total income.
Do it Yourself
 Mr. Jay is beneficially holding 21% equity shares of PTK Pvt.
Ltd. Mrs Jay is employed as a finance manager in PTK Pvt. Ltd.
The monthly salary received from PTK Pvt. ltd. is Rs. 40,000.
Mrs. Jay is not having any qualification, experience or
knowledge of finance.

 In this situation, Mr. Jay has a substantial interest in PTK Pvt.

Ltd. with 21% shareholding. But Mrs. Jay is employed without
any qualification and technical knowledge of finance. Hence,
salary or payment received by Mrs. Jay from PTK Pvt. Ltd. will
be clubbed with the income of Mr. Jay as per section 64(1)(ii)
of the income tax act.
 In the above case, if Mrs. Jay had the qualification and
knowledge for the finance manager post in PTK Pvt. ltd., then
income earned by Mrs. Jay will not be clubbed in the income
of Mr. Jay.
Do it Yourself
 Mr. Lucky gifted Rs. 6,00,000 to his wife. Mrs. Lucky has
then invested the same amount in the fixed deposit. Mrs.
lucky receives the interest of 5,000 p.a. from such fixed
deposit.
 As Mr. Lucky has transferred Cash (asset) without
adequate consideration and it was converted into another
asset by Mrs. Lucky. Hence, interest earned of Rs. 5,000
from the converted asset (fixed deposit) will be clubbed
in the income of Mr. Lucky as per section 64(1)(iv) of the
income tax act.
Income from Assets transferred to
Son’s Wife [Sec 64(1)(vi)]
Income from assets transferred to son’s wife attract the
provisions of section 64(1)(vi) as per conditions below:
 The taxpayer is an individual.
 He/She has transferred an asset after May 31, 1973. The
asset is transferred to son’s wife.
 The asset is transferred without adequate consideration.
In the case of such individuals, the income from the asset is
included in the income of the taxpayer who has transferred
the asset.

Example: Mrs. X transfers a bank deposit of Rs. 20,000 in

favour of her son’s wife, without adequate consideration.
 Income accrued to son’s wife shall be included in the
income of Mrs. X.
Income from Asset transferred to a person
for benefit of Spouse [Sec 64(1)(vii)]

Income from the assets transferred to a person for the benefit of

spouse attracts the provisions of section 64(1)(VII) on clubbing of
income, if :
 The taxpayer is an individual.
 He/She has transferred an asset to a person or an association of
persons. The asset is transferred for the benefit of spouse.
 The transfer of asset is without adequate consideration.
In the case of such individuals, income from such an asset is
taxable in the hands of the taxpayer who has transferred the
asset.

Example: X transfers Government bonds without consideration to

an association of persons subject to the condition that the interest
income from these bonds will be utilized for the benefit of Mrs. X.
 Interest from bonds shall be included in the income of X.
Income from Asset transferred to a person
for benefit of son’s wife [Sec 64(1)(viii)]

Income from the assets transferred to a person for the benefit of

son’s wife attracts the provisions of section 64(1)(VII) on clubbing
of income, if:
 The taxpayer is an individual.
 He / She has transferred an asset after May 31, 1973.
 He / She has transferred an asset to a person or an association of
persons. The asset is transferred for the benefit of son’s wife.
 The transfer of asset is without adequate consideration.
In the case of such individuals, income from such an asset is
included in the income of the person who has transferred the asset.
Example: Mr. X transfers an industrial undertaking to an association
of persons subject to the condition that out of the annual income
(30 lakhs), a sum of Rs. 5 lakhs shall be utilized for the benefit of
the daughter-in-law of X.
 In this case, Rs. 5,00,000 shall be included in the income of Mr. X.
Income of Minor Child [Sec 64(1A)]

 All income which arises or accrues to the minor child shall

be clubbed in the income of his parents, whose total
income (excluding the minor’s income) is greater.
 However, in case parents are separated, the income of
the minor child will be included in the income of that
parent who maintains the minor child in the relevant
previous year.

Exemption to parent [sec. 10(32)]: An individual shall be

entitled to an exemption of Rs.1,500 p.a. in respect of each
minor child if the income of such minor as included u/s
64(1A) exceeds that amount. However if the income of any
minor child is less than Rs. 1,500 p.a. the aforesaid
exemption shall be restricted to the income so included in
the total income of the individual.
Income of Minor Child [Sec 64(1A)]

When Section 64(1A) is not applicable

In case of income of minor child from following sources, the
income of minor child is not clubbed with the income of his
parent:
 Income of minor child on account of any manual work.
 Income of minor child on account of any activity involving
application of his skills, talent or specialized knowledge &
experience.
 Income of minor child suffering from any disability
specified u/s 80U.
Illustration: Section 64(1A)

3. A and B are minor sons of X and Mrs. X. Business income

of X is Rs. 3,40,000. Income from house property of Mrs.
X is Rs. 1,90,000. Income of A and B from stage acting is
Rs. 60,000 and Rs. 70,000 respectively.
 Besides, interest on company deposits of A and B
(deposit was made out of income from acting) is Rs.
30,000 and Rs. 1,000, respectively.
 A and B have received the following birthday gifts- on
May 20, 2022, gift received by B from his grandfather: Rs.
80,000; on September 14, 2022, gift received by A- Rs.
60,000 from X’s friend and Rs. 35,000 from a relative.
Find out the income of X, Mrs. X, A and B for the
assessment year 2023-24.
Solution:
X Mrs. X A B
Income from house property 1,90,000
Business income 3,40,000
Income from stage acting 60,000
70,000
Gift received by B (Gift from a
relative is Not taxable)
Gift received by A from friend 58,500
(exemption Rs. 1,500)
Gift received by A (Not taxable)
Interest from company deposit (A) 30,000
Interest from company deposit (B)
(1,500 exemption) Nil
.
Net Income 4,28,500 1,90,000 60,000
70,000
Conversion of Self-acquired property into Joint
Family property and subsequent partition:
Section 64(2)
 Where an individual (being a member of a Hindu undivided
family) converts (after December 31, 1969) his self-acquired
property into property belonging to the family.
 When an individual transfers his self-acquired property,
directly or indirectly, to the family otherwise than for
adequate consideration.
 Income from the converted property transferred for less
than adequate consideration is chargeable to tax in the
hands of the transferor. (Clubbing before partition)
 If the property transferred by an individual is subsequently
transferred amongst the members of the family (Clubbing
after partition), the income derived from such converted
property as is received by the spouse or minor child of the
transferor, will be included in the income of the transferor.
Conversion of Self-acquired property into Joint
Family property and subsequent partition:
Section 64(2)
4. X transfers his self-acquired property yielding an annual income
of Rs. 60,000 to his Hindu undivided family, consisting of X, Mrs.
X, his major son Y and his minor son Z.
Would the answer differ if the property was subsequently
partitioned equally among the family members?

 Income of Rs. 60,000 will be included in the income of X and not

of the HUF by virtue of Section 64(2).
 Income of X:
Own share out of converted property 15,000
Share of Mrs. X [under section 64(2)] 15,000
Share of minor child [under section 64(1A)] 13,500
after exemption of Rs. 1,500
Total 43,500
Can Negative Income be Clubbed?
 Yes, because the word ‘income’ includes a loss. If income is
negative and clubbing provisions are applicable, then
negative income would be clubbed. Under Section 64, the
income (including loss) of a specified person is liable to be
included in the total income of the individual.

Minor son of Y has a business. For the previous year 2022-23,

loss from business income is Rs. 20,000.
 The loss of Rs. 20,000 will be included in the income of Y or
Mrs. Y whosoever has higher income.

X transfers Rs. 1,00,000 to Mrs. X. By investing Rs. 1,00,000,

Mrs. X sets up a business (total investment only Rs. 1,00,000).
For the previous year, income from business is (-) Rs. 40,000.
 The loss will be included in the income of X.