What Is the Meaning of Clubbing of Income Under Income Tax?

In the context of Indian income tax, the term clubbing of income refers to the inclusion of income of a spouse, minor child, or other relatives in the income of the taxpayer. This is done to ensure that income is not shifted to family members to avoid tax liability. The Income Tax Act, 1961 includes provisions under Section 64 for clubbing, which prevents individuals from transferring their income-generating assets to family members for tax benefits.

Clubbing of Income under the Income Tax Act:

Section 64 of the Income Tax Act:

Section 64 of the Income Tax Act governs the clubbing of income provisions. It specifies circumstances where the income of a relative or family member will be clubbed with the income of the individual who has transferred the asset or income.

The primary objective of these provisions is to prevent tax avoidance by transferring assets that generate income to family members in lower tax brackets.

Situations Where Clubbing of Income Applies:

Income of Spouse:

If a taxpayer transfers an asset to their spouse, and the income from that asset is earned by the spouse, the income will be clubbed with the income of the person who made the transfer.

Example: If a person transfers a house property to their spouse and the rent earned from the property is ₹50,000 per year, that ₹50,000 will be added to the income of the person who made the transfer.

Exceptions:

• Income from assets transferred due to a separation agreement or court order will not be clubbed.
• If the income is earned through a spouse’s independent source of income (like a professional income), the income is not clubbed.

Income of Minor Child:

The income of a minor child (below 18 years) is also clubbed with the income of the parent (usually the father) in case the income is generated from assets transferred by the parent.

However, minor child’s income is not clubbed if the income arises from the child’s own skill, talent, or labor, such as income from a child artist or a child actor.

Exception:

• If the minor child earns income from assets transferred by the parent (like a fixed deposit), that income is clubbed with the parent's income.

Example: If a parent transfers an asset to their minor child, and the child earns ₹10,000 in interest income, this ₹10,000 will be added to the parent's taxable income.

Income of Other Relatives:

If a taxpayer transfers an asset to a relative other than a spouse or minor child (like a sibling or parent), income earned by that relative from the asset is not clubbed with the taxpayer’s income. The clubbing provisions apply primarily to spouses and minor children.

Income from Gifts or Assets:

If a person gifts an asset to a relative, and the income from that asset is earned by the relative, clubbing of income provisions may apply depending on the recipient’s relationship with the donor.

Example: If an individual transfers a property to their spouse or minor child, the rental income or any other income earned from that property is clubbed with the income of the person making the transfer.

Deductions and Exceptions:

Income from Assets Transferred to Spouse (Other than by Will):

When an asset is transferred to a spouse or a minor child (other than through a will), the income from that asset is considered as the taxpayer’s income and will be taxed accordingly.

Income from Assets Transferred to Spouse under a Will:

If a person transfers property under a will and the income generated by that property is given to the spouse, the income is not clubbed with the individual’s income.

Income from Certain Transfers to Minor Children:

The clubbed income provisions do not apply to income generated by a minor child from their skill or talent, such as earnings from acting, singing, or playing a sport.

If the minor child’s income arises from a gifted asset, then the income is clubbed with the parent’s income.

Impact of Clubbing of Income:

Tax Liability:

Clubbing of income means that the taxpayer is liable to pay tax on income that was not directly earned by them. It increases the total taxable income of the taxpayer, which could push them into a higher tax slab.

Avoidance of Tax Benefits:

The primary purpose of clubbing of income provisions is to avoid tax benefits that could be claimed by transferring assets to family members in lower tax brackets. For example, income that could have been taxed at a lower rate in the spouse’s name would now be taxed at the higher rate of the person who transferred the asset.

Tax Planning:

Effective tax planning can help in legally reducing the tax impact of clubbing. This includes transferring income-generating assets to other family members where possible or avoiding transferring assets in a way that causes excessive clubbing of income.

Examples of Clubbing of Income:

Example 1: Income of Spouse

Mr. Sharma transfers a rental property to his wife, and the property earns ₹1,00,000 as rent annually. This income will be clubbed with Mr. Sharma’s income for tax purposes, and he will pay tax on the total rental income of ₹1,00,000 in addition to his other taxable income.

Example 2: Income of Minor Child

Mrs. Gupta transfers a fixed deposit to her minor child, and the interest earned from the fixed deposit is ₹20,000. This interest income will be clubbed with Mrs. Gupta’s income and taxed accordingly.

Example 3: Income of Transfer to Minor

Mr. Sharma gifts ₹5 lakh to his minor child, and the interest earned on that amount is ₹30,000. Since the child is a minor, this income will be clubbed with Mr. Sharma’s income and taxed.

Conclusion:

The concept of clubbing of income ensures that individuals cannot avoid tax liability by shifting income-generating assets to family members, especially to spouses or minor children. The income from such assets is added to the taxpayer's income, which could lead to higher tax payments. It is essential to understand the provisions of Section 64 of the Income Tax Act to manage family wealth and avoid unnecessary tax burdens through clubbing.