Section 64 Clubbing Income

Section 64 Clubbing Income | Specified Persons and Scenarios for Clubbing Income

February 21, 2024 / Income Tax / By

Section 64 Clubbing Income: There are many occasions when an individual may need to club the income of someone else with the individual’s income. If one is planning to transfer any of the assets/income owned by an individual to another person as a means of tax planning for avoiding the income getting taxed in the individuals’ hands, hold on. Such transfers can result in the attraction of the clubbing provisions under the laws of Indian income tax.

Even genuine gifts extended to an individual’s kith and kin can have such income tax implications. It will help an individual immensely if they get some insights on the clubbing provisions under the laws of Indian income tax. Therefore, let us understand these requirements a little more in detail.

Clubbing of Income

As the phrase suggests, clubbing of an individual’s income implies adding or including another individual’s income (mostly family members) to one’s income. This is permitted under Section 64 of the IT Act. However, some restrictions about the specified individual(s) and specified examples are mandated to discourage this practice.

Specified Persons for Clubbing Income

The income of any individual cannot be clubbed on a random basis when computing the total income of any individual. Also, not all income of a specific person can be clubbed. According to Section 64, there is the only particular specified income of particular individuals which can be clubbed when computing the total income of an individual.

Specified Scenarios When One Can Club Income

Section Specified person Specified scenario Income to be clubbed
Section 60 Any person Transferring income without transferring the assets either by the way of any agreement or any other way, Any income from such an asset is going to be clubbed in the hands of the transferor

 
Section 61 Any person Transferring the asset on the condition which it can be revoked Any income from these assets are going to be clubbed by the hands of the transferor
Section 64(1A) Minor child Any income arising or increasing to the minor child where the child includes both a stepchild and adopted child. The clubbing provisions apply to even minor married daughters. Income is going to be clubbed by the hands of higher-earning parents.

Note:

In case the marriage of the child’s parents doesn’t exist, income should be clubbed into the payment of the parent who has maintained the minor child in the year before.

In case a minor child’s income is clubbed in the parent’s hands, then the exemption of Rs. 1,500 is permitted to the parent.

Exceptions to clubbing

Income for a disabled child (disability of nature that has been specified in section 80U)

Income is earned by the manual work done by the child or by the activity involving the application of their skill and talent or specialised knowledge and experience.

Income earned by a notable child. This is going to also include income earned from the investments made out of the money given to the adult child. Also, the money that is given to an adult child is exempted from the gift tax under gifts to ‘relative’.
Section 64(1)(ii) Spouse** In case a spouse receives any remuneration irrespective of the nomenclatures like Salary, fees, commission or any different form and by any mode, i.e., cash or in-kind, from a concern in which an individual has substantial interest* Income should be clubbed in the taxpayer’s hands or spouse, whose income is greater (before clubbing). The privilege of clubbing: Clubbing is not attracted in case the spouse possesses professional or technical qualifications concerning any of the income arising to the spouse, and this income is entirely attributable to the application of the professional or technical knowledge and experience.
Section 64(1)(iv) Spouse** Direct or indirect transfer of the assets to the spouse by an individual for the inadequate consideration Income from out of this investment is clubbed in the transferor hands. Provided the support is different than the house property.

Exceptions for clubbing of No clubbing of income in the stated cases:

a. Where the asset has been received as part of the divorce settlement

b. In case the assets are being transferred prior to marriage

c. No husband-and-wife relationship survives on the date of accrual of income

d. Asset out of pin money (i.e., an allowance that is given to the wife by her husband for the personal and general household expenses)
64(1)(vi) Daughter-in-law Transfer of the assets transferred directly or indirectly to the daughter-in-law by the individual for the inadequate consideration Any income from these assets transferred is clubbed in the transferor hands.
64(1)(vii) Any individual or association of person Transferring any of the assets directly or directly for the inadequate consideration to any individual or association of persons to benefit the daughter-in-law either immediately or on a deferred basis Income from these assets is going to be considered as the individual’s income and clubbed in their hands.
64(1)(viii) Any individuals or association of person Transferring any of the assets directly or directly for the inadequate consideration to any individual or association of persons for benefiting their spouse either immediately or on a deferred basis Income from these assets is going to be considered as the individual’s income and clubbed in their hands.
Section 64(2) Hindu Undivided Family In case the member of a HUF transfers their individual property to the HUF for inadequate consideration or converts this property into the HUF property, Income from this converted property is going to be clubbed in the hands of an individual.

*An individual is known to have a strong interest in the concern in case–

  • If in a company, a person either by themselves or along with their relative/s beneficially owns the shares having 20% or more for voting power (not being shares entitled to a particular rate of the dividend whether with or without a further right for participating in profits)
  • In any other scenarios, such people, either singly or along with their relative/s, is entitled to 20% or more of the profits in the aggregate of these concern at any time during the year before.

**Income from these reinvestments of the clubbed income by an individual’s spouse is not going to be clubbed in the individual hands.

Situation 1

Ms. P owns a shop that has a rent of Rs.12,000 each month. She transfers the rent to her friend Mr. S but holds onto the ownership of the shop.

In this case, Ms. P has transferred the source of income without transferring the asset itself. Hence, according to section 60 of the income tax act, Ms. P needs to include the rental income when computing her total income.

Situation 2

Mrs. Jayita is beneficially holding the 21% equity shares of the PTK Pvt. Ltd. Her spouse has been employed as a finance manager in the same company. The monthly salary received from the company is Rs. 40,000. Mrs. Jayita’s spouse is not having any qualifications, experience, or knowledge of finance.

In this scenario, Mrs. Jayita has a keen interest in PTK Pvt. Ltd., With a 21% shareholding. But her spouse is employed without any such qualification or technical knowledge of finance. Hence, the salary received by her spouse from the company is going to be clubbed with the income of Mrs. Jayita according to section 64(1)(ii) of the income tax act.

In this case, if Mrs. Jayita’s husband had the qualification and the knowledge for the finance management post in PTK Pvt. ltd., then the income earned by her spouse would not be clubbed with the income of Mrs. Jayita.

Situation 3

Mr. Sunny has gifted Rs. 6,00,000 to his wife. Mrs. Sunny has invested this same amount in a fixed deposit. Mrs. Sunny gets the interest of Rs. 5,000 p.a. from such a fixed deposit.

Mr. Sunny has transferred the Cash (asset) without proper consideration, and it has been converted into a new purchase by Mrs. Sunny. Therefore, interest earned of amount Rs. 5,000 from the converted asset (fixed deposit) is going to be clubbed in Mr. Sunny’s income according to section 64(1)(iv) of the income tax act.

Note:

  1. In the case in the above scenario, Mr. Sunny transfers the asset as a settlement for a divorce, so clubbing provisions will not be applied.
  2. Also, in case the cash had been transferred prior to marriage and interest is accrued after marriage, no income is going to be clubbed in the hands of Mr. Sunny.

Therefore, the relationship of husband and wife has to exist at the time of transfer of the asset(s) and during the time of the accrual of income.

Things To Keep in Mind

  • The clubbing provision is applicable for Income and loss both.
  • Capital gain on any transfer of any asset by the transferee will be considered income, and it must be clubbed into the transferor’s income.
  • The income accrued from the converted form of any asset must be clubbed into the hands of the transferor.
  • If part consideration is paid or payable, only the inadequate care is going to be clubbed transferor’s hands.
  • The clubbing provisions are not going to be applicable to the income accrued from the clubbed income.

For example, if Rs. 5 lakh is transferred to the spouse or the daughter-in-law without proper consideration and interest of Rs. 20,000 on these bonds are clubbed transferor’s hands. However, if the spouse or the daughter-in-law further gets any income from these interests of Rs. 20,000, no clubbing provisions are going to be applicable on such income.

The clubbing provisions are going to apply in case of indirect transfers or cross transfers as well.

For example: In case Mr. M gifts a sum of Rs. 8,000 to Mrs. S and Mr. S gifts a sum of Rs. 15,000 to Mrs. M. Say both the gifts have been given without any consideration. Then the overlapping amount – Rs. 8,000 is going to be clubbed in the hands of the transferors.

Is a minor child’s income going to be clubbed with the income of the parent? Or how can a parent claim the TDS deducted from their minor’s child’s income?

According to section 64(1A), a minor child’s income will be clubbed with their parent’s income (*). Income of a minor child that has been earned on account of manual work or other activities involving the application of the child’s knowledge, skill, talent, or experience, etc., is not going to be clubbed with the parent’s income. However, accumulation from this income is going to be clubbed with the income of the parent of such a minor child.

A minor child’s income will be clubbed with the income of the parent whose salary (excluding the minor’s income) is more significant.

In case the marriage of guardians does not sustain and ends up in divorce, then the minor’s income is going to be clubbed with the parent’s income who takes care of the minor.

In case the income of the parent of the child involves the income of their minor child, these individuals can choose to claim an exemption under section 10(32)) of Rs. 1,500 or the wage of the minor child so clubbed, whichever is lesser.

(*) Provisions of section 64(1A) are not going to be applicable to any income of a minor child who has any disability specified under section 80U. In other words, the income of a minor child who has any disability that has been established under section 80U is not going to be clubbed with their parent’s income.

Situation 4

Mr. Akash has two minor children, that is Master M, and Master N. Master M is a child artist, and Master N suffers from a disability specified under section 80U. Income of M and N are as follows:

  • Income of M from stage shows Rs. 1,00,000
  • Income of M from bank interest: Rs. 6,000
  • Income of N from bank interest: Rs. 1,20,000.

Will the income of these minor children – M and N – be clubbed with the income of their parents (Mrs. Akash does not have any income)?

According to section 64(1A), the income of a minor child is clubbed with the income of their parent whose income (excluding the minor’s income) is higher. In this scenario, Mrs. Akash does not have any such income and, thus, if any income is going to be clubbed, then it is going to be clubbed with the income of Mr. Akash.

Income earned by a minor child on account of manual work or income from their knowledge, skill, talent, or experience, etc., of the minor child, is not going to be clubbed with the income of their parents. Thus, the income of M from the stage show is not be clubbed with the income of Mr. Akash but the income of M from the bank interest of Rs. 6,000 is going to be clubbed with the income of Mr. Akash.

The income of a minor who suffers from a disability specified under section 80U is not going to be clubbed with the income of the parent. Thus, any income of N will not be clubbed with the income of Mr. Akash.

The taxpayer can choose to claim an exemption under section 10(32)). Hence, in respect of the interest income of Rs. 6,000 clubbed with the income of Mr. Akash, and he is going to be entitled to claiming exemption of Rs. 1,500 under the section 10(32)). Thus, the net income that will be clubbed will be Rs. 4,500 (as., Rs. 6,000 – Rs. 1,500).

Deductee files as a declaration from the deductor. The deductor reports the tax deduction in the other individual’s name in the information related to a tax deduction as referred to in the sub-rule (1) of rule 37BA.

Will, any of the provisions of clubbing be applied in case the asset(s) are transferred to a Hindu Undivided Family (HUF) by the family member?

According to section 64(2), when a person, being a member of a HUF, transfers their property to the HUF or for adequate consideration, otherwise converts their property into a property that belongs to the HUF (this is done by associating such property with the character of the joint family property or throwing this property into common stock of the HUF), then clubbing provisions will be applicable as follows:

Before a HUF part, the whole income from this transferred property is going to be clubbed along with the transferor’s income.

On the partition of the family, this property is distributed between the members of the HUF. In such a scenario, the income incurred from this transferred property by the transferor’s spouse is going to be clubbed along with the income of an individual and is going to be charged to tax in their hands.

Can income from the transferred assets to an individual for the benefit of the spouse or advantage of the son’s wife without proper consideration be clubbed to the transferor’s income?

According to section 64(1)(vii), if a person transfers (directly or indirectly) their asset otherwise for proper consideration to an individual or an association of people for the immediate or deferred benefit of their spouse, then income that arises from this asset that has been transferred is going to be clubbed with the transferor’s income.

According to section 64(1)(viii), if a person transfers (directly or indirectly) their asset otherwise for adequate consideration to an individual or an association of people for the immediate or deferred benefit of their son’s wife, then income coming from the asset(s) that have been transferred will be clubbed with the transferor’s income.

Can income from the transferred assets to the son’s spouse without regular consideration be clubbed along with the transferor’s income, i.e., father-in-law or mother-in-law?

According to section 64(1)(vi), if a person transfers (directly or indirectly) their asset to their son’s spouse otherwise than for adequate consideration, then income from this asset will be clubbed along with the income of the person (i.e., transferor being father-in-law or mother-in-law). The provisions for clubbing are going to apply even if the asset form is alerted by the transferee- son’s spouse.

In case the assets are being transferred prior to the marriage of the son, no income is going to be clubbed from the asset even after they get married, as the relation between the father-in-law or the mother-in-law and son’s spouse must exist both during the time of the transfer of the asset and at the time of the collecting of income from the asset.

If the relation between the father-in-law or the mother-in-law and son’s spouse doesn’t exist on the date of collection of income, then the clubbing provisions are not going to apply.

In which situations make the clubbing provisions does not apply if the income from transferred assets to spouse?

The provisions of clubbing of section 64(1)(iv) are not applied in the following situations:

  • If the asset transfer is for proper consideration;
  • If the asset transfer is connected with an agreement of living apart;
  • If the asset transfer is done before marriage, no income is going to be clubbed even after the wedding, as the relation of spouses must exist both during the time of transfer and collection of income.

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