What Is Clubbing of Income?
Clubbing of income is a concept under Indian tax laws that prevents tax avoidance by transferring income to another person, typically a family member, to fall under a lower tax slab. It means including another person’s income in your total taxable income under certain conditions. This usually applies in cases where income is shifted to a spouse, minor child, or a specified relative, but the control or benefit remains with the transferor. For example, if a husband gifts money to his wife and she earns interest on it, that interest may be taxed in the husband’s hands. The law ensures that the individual who actually benefits from the income pays the appropriate tax on it.
Legal Provisions Related to Clubbing of Income
The Income Tax Act, 1961, from Sections 60 to 64, deals with the provisions related to clubbing of income.
- Section 60 covers situations where income is transferred without transferring the asset, in which case the income is still taxable in the hands of the transferor.
- Section 61 and 62 deal with revocable and irrevocable transfers of income-producing assets.
- Section 64(1)(ii) says that if a husband or wife receives income from an asset transferred by their spouse without adequate consideration, it shall be clubbed with the income of the person who made the transfer.
- Section 64(1A) deals with the income of a minor child, which shall be added to the income of the parent with the higher income, except in certain cases like income due to manual work or application of skill.
Why Clubbing Provisions Matter
Clubbing provisions act as a shield against tax evasion through smart yet unethical planning. Without these rules, a high-earning taxpayer could transfer assets or income to family members who fall under lower tax brackets, thereby reducing the family’s total tax liability unfairly. The Income Tax Department uses clubbing rules to trace the origin and control of income and tax it appropriately. This reinforces the principle of taxing the right person for the right income. Taxpayers must be cautious when gifting or transferring income-generating assets to their relatives to avoid unexpected tax liability.
Mnemonic :
Mnemonic to Remember Clubbing Sections
🧠 “**Some Gifts Are Tricky – 60 to 64 Will Fix It Quickly!”
- 60 – Transfer of income without transfer of asset
- 61 – Revocable transfer
- 62 – Irrevocable transfer (with exceptions)
- 63 – Definitions for revocable transfer
- 64 – Income of spouse, minor child, and relatives
