Understanding Income Clubbing

● Under the Income-tax Act, 1961, an assessee is typically liable to pay tax on their own
income. However, in certain circumstances, the Act requires an assessee to be taxed on the
income of another person.
● These situations are governed by the provisions of sections 60 to 64, which are specifically
designed to prevent tax avoidance.
● Income clubbing refers to the process of combining the earnings of another individual, often
a family member, with your own income for tax purposes.
● This practice is governed by Section 60-64 of the Income Tax Act, which permits such
aggregation under specific conditions.
● To prevent misuse, the law imposes certain limitations related to particular persons and
defined situations, aiming to discourage unwarranted income clubbing.
Source:-ICAI
Source:-ICAI
Source:-ICAI
Source:-ICAI
● A revocable transfer happens when someone gives an asset to another person but keeps the right to take it
back in the future.

● The person who gives the asset is called the transferor.

● The person who receives the asset is called the transferee.

● As per tax rules (clubbing of income provisions):

○ If the transfer is revocable, any income earned from that asset will be taxed in the hands of the
transferor, not the transferee.
 EXCEPTIONS TO SEC.61

Transfer not revocable

during the life time of the
beneficiary Transfer not revocable
during the life time of the
the transferee

Transfer Transfer made not

made via via Trust
Trust

If the transferor derives any direct or indirect benefit from the

income of the transferred asset:
transferor derives no The income will be included in the transferor’s total income, even transferor derives
direct or indirect benefit if the transfer is not revocable during the lifetime of the beneficiary no direct or indirect
or transferee. benefit from such
from such income. income.
 EXCEPTIONS TO SEC.61

Transfer made before April 1, 1961 and not revocable for a period exceeding six years

Special Rule for Transfers Made Before April 1, 1961

1. 🕰 Old Transfers Only

○ Applies to asset transfers made before April 1, 1961.

2. ⏳ Not Easily Revocable

○ The transfer must not be revocable for more than 6 years.

3. 🚫 No Hidden Benefits

○ The transferor must not receive any direct or indirect benefit from the income.

4. ✅ What Happens Then?

○ If all the above conditions are met, the income from the asset will NOT be added to the transferor’s total
income.
Source:-ICAI
Source:-ICAI
● Clubbing of Remuneration to Spouse:
If an individual has a substantial interest in a concern,
any remuneration (in cash or kind) paid to their spouse by
that concern shall be clubbed with the individual's income.

● Exception – Professional or Technical Qualifications:

The above clubbing provision does not apply if the
spouse receives remuneration solely due to their
professional or technical qualifications and not because of
the relationship.

● Both Spouses Have Substantial Interest:

If both husband and wife have a substantial interest in
the concern and receive remuneration, clubbing will not
apply provided the remuneration is due to their own
qualifications or efforts.
RELATIVE as per sec.64(1)(ii)
 PARTICULARS AMOUNT

Income under the head Salary of Mrs. B (Computed) 3,44,000

Income from other sources 30,000

- Interest on securities

3,74,000

PARTICULARS AMOUNT AMOUNT

Income from Salary NIL

[clubbed in the hands of Mr. B]

Income from house property 72,000

Gross Annual Value [` 6,000 × 12]
Less: Municipal taxes paid - NIL
Net Annual Value (NAV) 72,000
Less: Deductions under section 24
- 30% of NAV i.e., 30% of ` 72,000 21,600
- Interest on loan NIL
50,400
NET ANNUAL VALUE

Since Mrs. B is not professionally qualified for the job, the clubbing provisions shall be applicable.
 Income arising to spouse –
Asset - [Sec. 64(1)(iv)] – Transfer of Asset

Sells shares
& earn
Gifts Rs.50,000 Invested in Capital Gain
shares

Who is Liable to
Pay Tax? Husband is liable
 EARNS INTEREST TAXABLE in the
Gifts Rs.50,000
OF Rs.5000 on FD hands of→

She re-invested Rs.5000

into FD and earns interest
of Rs.5,500

So Who will pay tax on

Extra Rs.500 interest
income?
Mr. Vaibhav started a proprietary business on 01.04.2018 with a capital of` 5,00,000. He incurred a
loss of ` 2,00,000 during the year 2018-19. To overcome the financial position, his wife Mrs. Vaishaly,
a software Engineer,gave a gift of ` 5,00,000 on 01.04.2019, which was immediately invested in the
business by Mr. Vaibhav. He earned a profit of ` 4,00,000 during the year 2019-20. Compute the
amount to be clubbed in the hands of Mrs. Vaishaly for the Assessment Year 2020-21. If Mrs. Vaishaly
gave the said amount as loan, what would be the amount to be clubbed?

Section 64(1)(iv) of the Income-tax Act, 1961 provides for the clubbing of income in the hands of the individual, if the income earned is from the
assets
(other than house property) transferred directly or indirectly to the spouse of the individual, otherwise than for adequate consideration or in
connection with an agreement to live apart.In this case, Mr. Vaibhav received a gift of ` 5,00,000 on 1.4.2019 from his wife Mrs. Vaishaly, which he
invested in his business immediately. The income to be clubbed in the hands of Mrs. Vaishaly for the A.Y. 2020-21 is computed as under:

Particulars Mr. Vaibhav’s capital Capital Total

contribution contribution
out of gift
from Mrs.
Vaishaly

Capital as on 1.4.2019 3,00,000 5,00,000 8,00,000

(5,00,000 – 2,00,000)

Profit for P.Y. 2019-20 1,50,000 2,50,000 4,00,000

to be apportioned on (400000x 3 / 8) (400000 x 5 /8)
the basis of capital
employed on the first
day of the previous
year i.e. as on 1.4.2019
(3:5)
Therefore, the income to be clubbed in the hands of Mrs. Vaishaly for the A.Y.
2020-21 is ` 2,50,000.
In case Mrs. Vaishaly gave the said amount of ` 5,00,000 as a bona fide loan, then, clubbing provisions would not be
attracted. Note: The provisions of section 56(2)(x) would not be attracted in the hands of Mr. Vaibhav, since he has
received a sum of money exceeding` 50,000 without consideration from a relative i.e., his wife.
A minor’s income is clubbed with the parent who has the higher income, and all future income of the minor continues to be
taxed with the same parent unless either parent applies to the Assessing Officer and the officer approves a change.
 Key points regarding clubbing of a minor child's income:

Exceptions: The following are not clubbed with the parent's income:

● Income earned by a minor child due to their own manual work.

● Income earned from personal skill, talent, specialized knowledge, or experience (e.g., winning a prize or from
sports/music).

● Who pays the tax: The income is included in the income of the parent with the higher income.

● If parents are separated/divorced, it is added to the income of the parent who maintains the child.

● If both parents are deceased, the minor files a separate return through a guardian, and clubbing provisions do not
apply.

● Exemption: The parent in whose hands the minor’s income is clubbed can claim an exemption of ₹1,500 per
minor child per year under Section 10(32), or the actual income clubbed, whichever is lower—up to two
children.

● Accretion of income: Even if some income is not clubbed (e.g., prize winnings from talent), subsequent income
earned from investing such money (like interest) will be subject to clubbing with the parent's income.
Compute the gross total income of Mr. A & Mrs. A from the following information assuming both exercise the option of shifting
out of the default tax regime provided under section 115 BAC(1A):

Brief working is sufficient. Detailed computation under various heads of income is not required.
● Under Section 64(1A) of the Income-tax Act, all income of a minor child is clubbed with the parent who has the higher
total income (excluding the minor's income).
● In our example, since Mr. A's income (3,90,000) is higher than Mrs. A's (2,30,000), the minor children’s income will be
clubbed with Mr. A.
● Income earned by the minor from personal skill, talent, specialized knowledge, or experience is NOT clubbed, but
any interest earned from investing such income (like bank interest) will still be clubbed.
● An exemption of Rs. 1,500 per minor child is allowed on the income being clubbed in the parent’s hands.
● This is assumed to be the first year these clubbing provisions apply; all calculations will follow these rules in future
years as well.
● The gross total income of Mrs. A remains at `2,30,000, while Mr. A's total income increases by the relevant clubbed
amounts.
Computation of gross total income of Mr. A for the A.Y. 2025-26

PARTICULARS Rs. Rs.

Income from profession 3,90,000

Income of minor son B from company deposit 15000

Less: Exemption under section 10(32) (1500) 13,500

PARTICULARS Rs. Rs.

Income of minor daughter C

From special talent – not to be clubbed - NIL

Interest from bank 3000

Gift of ` 2,500 received from a non-relative is not taxable NIL

under section 56(2)(x) being less than the aggregate limit
of ` 50,000

Less : Exemption under section 10(32) 1,500 1500

Gross Total Income 4,05,000

 COMPUTATION OF CLUBBED INCOME IN THE HANDS OF Mr. SHARMA

PARTICULARS Rs. Rs.

INCOME OF DAUGHTER 1 9,000

(-) Exemption u/s 10(32) (1,500) 7,500

INCOME OF DAUGHTER 2 (exempted) NIL

INCOME OF SON 1 6,200

(-) Exemption u/s 10(32) (1,500) 4,700

INCOME OF SON 2 4300

 MR.A MRS.A MINOR
INCOME FROM SALARY

Salary(Mrs. A) nil 2,40,000 nil

Pension(10,000x12) 1,20,000 nil nil

(Standard deduction (50,000) (50,000) nil

u/s 16)

TOTAL 70,000 1,90,000

INCOME FROM 52,000 nil nil

HOUSE PROPERTY

INCOME FROM OTHER SOURCES

Interest on 45,000
FD(5,00,000x9%)
 MR.A MRS.A MINOR
Commission recd 25,000 nil nil
(W/o technical
knowledge)

INCOME BEFORE 1,92,000 1,90,000 –

CLUBBING

INCOME OF MINOR 18,500

SON FROM
INVESTMENT
(20,000-1,500)

INCOME EARNED 20,000

FROM SPECIAL
TALENT

GTI 2,10,500 1,90,000 20,000