Clubbing of Income: Meaning, Rules & How to Avoid It

Introduction

The concept of clubbing of income is crucial in income tax laws to prevent tax evasion. It ensures that individuals do not divert their income to family members or other entities to reduce their tax liability. Understanding clubbing of income in income tax can help taxpayers plan their finances effectively and comply with tax regulations.

In this blog, we will cover clubbing of income meaning, rules, methods to avoid clubbing, and important notes, making it useful for taxpayers, students, and professionals.

What is Clubbing of Income?

Clubbing of income means adding another person’s income to the taxpayer’s total income for taxation purposes. When an individual legally transfers income-generating assets or income to a relative but retains substantial control over it, the income is added back to the individual’s taxable income.

Why is Clubbing of Income Important?

• Prevents tax evasion by transferring income to lower tax bracket individuals.
• Ensures fairness in the taxation system.
• Helps authorities track financial transactions and related tax liabilities.

Situations Where Clubbing of Income Applies

As per the Income Tax Act, 1961, the following cases are covered under clubbing provisions:

1. Transfer of Income Without Transferring the Asset (Section 60)

If a person transfers only the income from an asset without transferring the ownership of the asset, the income remains taxable in the hands of the original owner.

Example: Mr. A transfers rental income from a property to his son but retains ownership. The rental income will be taxed in Mr. A’s hands.

2. Transfer of Asset for Inadequate Consideration (Section 61)

If a person transfers an asset without adequate consideration but retains some control, the income generated from the asset will still be taxed in the hands of the transferor.

Example: Mr. B gifts his shop to his brother but continues to operate it. The income from the shop will be clubbed with Mr. B’s income.

3. Income of Minor Child (Section 64(1A))

Any income earned by a minor child is clubbed with the income of the parent who earns a higher income unless the income is due to the child’s own talent or manual work.

Exceptions:

• Income from a minor’s manual work, artistic skill, or any special talent is not clubbed.
• Parents can claim an exemption of up to ₹1,500 per child under Section 10(32).

4. Income of Spouse (Section 64(1)(ii))

If an individual’s spouse earns income from a business or asset provided by the taxpayer, the income will be clubbed with the taxpayer’s income.

Example: If Mr. C gifts ₹10 lakh to his wife, and she earns ₹1 lakh as interest from it, the interest income will be taxed in Mr. C’s hands.

5. Income from Assets Transferred to Daughter-in-Law (Section 64(1)(vi))

If a person transfers an asset to their daughter-in-law without adequate consideration, any income from that asset will be clubbed with the transferor’s income.

6. Income from Assets Transferred to a Trust for the Benefit of Spouse or Daughter-in-Law (Section 64(1)(vii) & (viii))

If a trust is created for the benefit of a spouse or daughter-in-law and assets are transferred, any income arising from it will be clubbed with the transferor’s income.

Specified Persons to Club Income

Income of any and every person cannot be clubbed on a random basis while computing total income of an individual and also not all income of specified person can be clubbed. As per Section 64, there are only certain specified income of specified persons which can be clubbed while computing total income of an individual.

Specified Scenarios to Club Income

Section	Specified person	Specified scenario	Income to be clubbed
Section 60	Any person	Transferring income without transferring asset either by way of an agreement or any other way,	Any income from such asset will be clubbed in the hands of the tranferor
Section 61	Any person	Transferring asset on the condition that it can be revoked	Any income from such asset will be clubbed in the hands of the transferor
Section 64(1A)	Minor child	Any income arising or accruing to your minor child where child includes both step child and adopted child. The clubbing provisions apply even to minor married daughter.	Income will be clubbed in the hands of higher earning parent. Note: If the marriage of the child’s parents does not subsist, income shall be clubbed in the income of that parent who maintains the minor child in the previous year.If a minor child’s income is clubbed in the hands of parent, then an exemption of Rs. 1,500 is allowed to the parent (This is applicable only if the parent opts for the old tax regime).Exceptions to clubbing Income of a disabled child (disability of the nature specified in section 80U) Income earned by manual work done by the child or by activity involving the application of his skill and talent or specialised knowledge and experienceIncome earned by a major child. This would also include income earned from investments made out of money gifted to the adult child. Also, money gifted to an adult child is exempt from gift tax under gifts to ‘relative’.
Section 64(1)(ii)	Spouse**	If your spouse receives any remuneration irrespective of its nomenclature, such as Salary, commission, fees or any other form and by any mode, i.e., cash or in kind from any concern in which you have substantial interest*	Income shall be clubbed in the hands of the taxpayer or spouse, whose income is greater (before clubbing). An exception to clubbing: Clubbing is not allowable if spouse possesses technical or professional qualifications in relation to any income arising to the spouse, and such income is solely attributable to the application of his/her technical or professional knowledge and experience.
Section 64(1)(iv)	Spouse**	Direct or indirect transfer of assets to your spouse by you for inadequate consideration	Income from out of such asset is clubbed in the hands of the transferor. Provided the asset is other than the house property. Exceptions to clubbing of income in the following cases:a. Where the asset is received as part of divorce settlementb. If assets are transferred before marriage,c. No husband and wife relationship subsists on the date of accrual of income.d. The asset is acquired by the spouse out of pin money (i.e. an allowance given to the wife by her husband for her personal and usual household expenses)
64(1)(vi)	Daughter-in-law	Transfer of assets transferred directly or indirectly to your daughter in-law by you for inadequate consideration	Any income from such assets transferred is clubbed in the hands of the transferor
64(1)(vii)	Any person or association of person	Transferring any assets directly or directly for an inadequate consideration to any person or association of persons to benefit your daughter in-law either immediately or on deferred basis	Income from such assets will be considered as your income and clubbed in your hands
64(1)(viii)	Any person or association of person	Transferring any assets directly or directly for an inadequate consideration to any person or association of persons to benefit your spouse either immediately or on deferred basis	Income from such assets will be considered as your income and clubbed in your hands
Section 64(2)	Hindu Undivided Family	In case, a member of HUF transfers his individual property to HUF for inadequate consideration or converts such property into HUF property	Income from such converted property shall be clubbed in the hands of individual

*An individual is said to have the substantial interest in the concern if–

• In case of a company, individual either by himself or along with his relative/s beneficially owns shares having 20% or more voting power (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits)
• In any other case, such individual either alone or along with his relative/s is entitled to 20% or more of profits in the aggregate of such concern at any time during the previous year. 

**Income from reinvestment of clubbed income by a spouse is not clubbed in the hands of individual.

How to Avoid Clubbing of Income?

To legally minimize tax liability and avoid clubbing of income of husband and wife, taxpayers can consider the following strategies:

1. Gift to Major Children

Income earned by major children (18 years or above) is not subject to clubbing. Parents can gift money to their children for investments to save tax.

2. Invest in Tax-Free Instruments

Income from PPF, ELSS, tax-free bonds, and Sukanya Samriddhi Yojana is exempt from tax and does not attract clubbing provisions.

3. Gifting to Parents or Siblings

Gifting money to parents or siblings who are in a lower tax bracket can help in reducing tax liability, as clubbing does not apply in such cases.

4. Separate Investment Sources for Spouse

Instead of gifting money directly, invest in a way that the spouse earns from their own profession or business to avoid clubbing.

5. Utilizing HUF for Tax Planning

Income from a Hindu Undivided Family (HUF) is taxed separately and is not subject to clubbing provisions, making it an effective tax planning tool.

Examples on Clubbing of Income

Income from Gifted Fixed Deposit:

• Mr. A gifts ₹5 lakh to his wife, and she deposits it in a fixed deposit, earning ₹40,000 interest per year.
• This ₹40,000 interest income will be clubbed with Mr. A’s total income and taxed accordingly.

Rental Income from Transferred Property:

• Mr. B owns a house and transfers the rental rights to his daughter-in-law while keeping ownership.
• The rent received by his daughter-in-law will be added to Mr. B’s income for taxation.

Investment in Business by Spouse:

• Mrs. C provides ₹10 lakh to her husband to start a business.
• The profits from this business will be clubbed with Mrs. C’s income unless her husband contributes substantial efforts in generating income.

Minor Child’s Income from Investments:

• Mr. D invests ₹2 lakh in stocks under his minor son’s name, and the portfolio earns ₹30,000 in dividends.
• This ₹30,000 will be added to Mr. D’s taxable income unless the child has earned it using personal skills.

Things To Remember

• The clubbing provision applies to Income and loss both.
• Capital gain on further transfer of the asset by the transferee will be considered as income and it shall be clubbed in the income of transferor. 
• The income derived from the converted form of asset shall be clubbed in the hands of transferor.
• If part consideration is payable or paid, then only the inadequate consideration will be clubbed in the hands of the transferor
• The clubbing provisions will not apply on the income derived from the clubbed income.

For example: If a bond is transferred for Rs. 5 lakh to the spouse or daughter-in-law without adequate consideration and interest of Rs. 20,000 on such bond is clubbed in the hands of the transferor. However, if the spouse or daughter-in-law further earns any income from such interest of Rs. 20,000, no clubbing provisions shall apply on such income.

• The clubbing provisions will apply for indirect transfers or cross transfers as well.

For example: If Mr K gifts a sum of Rs. 8,000 to Mrs. N and Mr. N gifts a sum of Rs. 15,000 to Mrs. K. Say both the gifts are without any consideration. Then the overlapping amount of Rs. 8,000 will be clubbed in the hands of the transferors.

Learn more about taxation in The Indian Tax System: What You Need to Know Blog

Conclusion

Understanding clubbing of income meaning and provisions is essential for effective tax planning. While tax laws prevent income diversion, taxpayers can legally structure their finances to minimize tax liability. By following the right investment strategies and knowing how to avoid clubbing of income, individuals can comply with tax regulations while optimizing their tax outgo.