Income from asset transferred to even your daughter-in-law will be clubbed to your income and will be taxable in your hand in this case, says income tax dept

The Income Tax Department has recently released a new brochure highlighting how clubbing of income provisions is applicable for individual taxpayers. Clubbing of income refers to the situation in which your wife’s or child’s or other person’s income is included in your total income and accordingly taxed. Under the Income Tax Act, 1961 income will be clubbed in the hands of either the husband or wife whose total income is higher.

Ramakrishnan Srinivasan, former chief commissioner of Income Tax Department says: "Many taxpayers are not aware of the clubbing provisions of Income Tax Act, 1961 and accordingly land up getting slapped with huge tax demand for arranging their financial affairs with their relatives. One such case which I remember was about a taxpayer who gave cash gift to his spouse and she invested it in fixed deposit in her name and offered interest income in her income tax return. The tax department applied the clubbing provisions and taxed the interest income in the hands of the husband. Similarly in another case, a salaried employee opened a fixed deposit (FD) in the name of his minor daughter out of his savings and did not offer the interest income in his hands thinking that interest is getting accumulated in his daughter’s account without realizing the clubbing provisions of Income Tax Act, 1961. The tax department brought the said income to tax in the hands of the employee and also levied stiff penalty on the ground under reporting of income which amounts to misreporting."

What is clubbing of income?

According to the income tax brochure, clubbing of income refers to including another person’s income in the taxpayer’s total income under certain circumstances as per the Income Tax Act, 1961. This is done to prevent tax evasion by transferring income to another person. The provisions of clubbing of income are applicable only to individuals and no other type of assessee like firm/HUF/Company, etc.

“Clubbing of income refers to a situation where a person is taxed for the income earned by another person. Under specific conditions, the income earned by other individuals (spouse, minor child, etc) is added to the income of the taxpayer.

Why clubbing of income is done?

The Income Tax Department introduced these provisions to ensure people don’t reduce their taxable income by transferring it to family members in lower tax brackets.

What are the key provisions under clubbing of income?

According to the Income Tax Department brochure here are the key provisions under clubbing of income:

Section 60: Transfer of income without transfer of assets
If a person transfers income to another person without transferring the asset, the income will still be taxable in the hands of the transferor.

Section 61: Revocable transfer of assets
Any income from an asset that can be transferred back to the taxpayer at any point in time is considered a revocable transfer, and the income is taxable in the hands of the transferor.

Section 64(1)(ii), 64(1)(iv), 64(1),(vii): Income of spouse
If an individual transfers any asset to their spouse, not under an agreement to live apart, the income generated from that asset will be clubbed with the transferor’s income.

Section 64(1)(vi), 64(1)(viii): Income from Assets transferred to Son’s wife
Income from assets transferred to the son’s wife, either directly or indirectly, is taxable in the hands of the transferor.

Section 64(1A): Income of a minor child
The income of a minor child is clubbed with the income of the parent whose income is higher. Exceptions are provided for income earned by the minor from manual work or specialised knowledge, etc

Section 64(2): Income from HUF
If a taxpayer converts individual property into a Hindu Undivided Family (HUF) or transfers property to an HUF without adequate consideration, the income from such a property is clubbed with the taxpayer’s income.

Exceptions to clubbing of income
According to the Income Tax Department brochure here are the details:

1. Income from personal skill or manual work: Income earned by a spouse through personal skill or manual work is not subject to clubbing.
2. Income of a minor child: The income of a minor child on which clubbing applies can be reduced by an exemption of Rs 1,500 per child, as provided under Section 10(32).
3. Income of spouse from independent funds: If the spouse earns income from assets acquired out of their independent funds, such income is not clubbed.

Tax implications of clubbing of income

The clubbed income is taxed at the applicable rates of the taxpayer in whose hands it is included. This can result in a higher tax liability, especially when income is transferred to individuals in lower tax brackets.

“Understanding the provisions of clubbing of income is essential to avoid unintentional tax evasion and penalties. Proper planning and compliance with these rules ensure smoother tax filing and legal tax-saving opportunities,” said the Income Tax Department.

"Appreciate CBDT for coming out with a brochures to enlighten taxpayers of consequences of not complying with this provision while filing returns," says Srinivasan.

Income from asset transferred to your daughter-in-law will be clubbed to your income and will be taxable in your hand?

Chartered Accountant Aastha Gupta, S.K. Gulati and Associates, says: "If an individual transfers (directly or indirectly) his/her asset to his/ her son's wife (daughter-in-law) otherwise than for adequate consideration, then income from such asset will be clubbed with the income of the individual (i.e., transferor being father-in-law/mother-in-law)."

Gupta says, "However, there is a catch to above. If the asset is transferred before marriage of son, no income will be clubbed even after marriage, since the relation of father-in-law/mother-in-law and daughter-in-law should exist both at the time of transfer of asset and at the time of accrual of income. If on the date of accrual of income, the relation of father-in-law/mother-in-law and daughter-in-law does not exist, then the provisions of clubbing will not apply.

Chartered Accountant Ashish Karundia explains that an important point regarding the exception mentioned above is that if the asset (say immovable property) is gifted by the future in-laws to the son’s prospective wife, then the clubbing provisions may not get triggered. "However, the stamp value of the immovable property itself may become taxable at the time of receipt of such gift (except when such gift is on the occasion of marriage) in the hands of the said woman (daughter-in-law) under section 56(2)(x) of the Income-tax Act, 1961. The said income needs to be reported as ‘income from other sources’ in the tax return and due taxes need to be paid."

Source: Income Tax Department Brochure

Some of the key situations where income is clubbed

According to Chartered Accountant (Dr.) Suresh Surana,

(i) Transfer of Income without transfer of asset (Section 60)

If a person transfers an income without transferring the asset from which such income has been generated, then such income is clubbed in the taxable income of the transferor. Such clubbing will take place irrespective of whether the income was transferred under a revocable or irrevocable agreement. For instance, a taxpayer receiving rent in the name of his wife for a house which is owned by him. In this case, the rental income would be clubbed in the hands of the taxpayer being the owner of the property. Thus, taxpayer should not divert the income without the legal ownership being transferred.

(ii) Income arising from revocable transfer of asset (Section 61)

Revocable transfer is that transfer where the transferor directly or indirectly, retains any right over the transferred asset or the transferor can regain the ownership of the asset from the transferee after such transfer. As per the provisions, income arising from a revocable transfer of asset will be clubbed in the hands of the transferor.

For instance, a taxpayer has transferred the ownership of asset to his friend with a right to regain the ownership after 5 years. Thus, in this case, any income accruing on such asset would be clubbed in the hands of the transferor and accordingly subjected to tax. It is pertinent to note that transfer which can be revoked only after the death of the transferee, will not be treated as revocable transfer.

(iii) Income received by spouse of an individual from a concern in which the individual has substantial interest [Section 64(1)(ii)]

When spouse of an individual receives remuneration (Salary, Commission, Bonus, etc.) from a concern in which the individual has substantial interest, then such remuneration is clubbed in the hands of the individual. Here, substantial interest means control or ownership of 20% or more of the voting power held by the individual and his relatives combined in such association. The term relative includes spouse, brother , sister, lineal ascendants or descendants of the individual. It is pertinent to note that when the spouse receives remuneration solely on account of his/her technical or professional qualifications and experience, then such remuneration will not be clubbed in the hands of the individual.

(iv) Income of a Minor Child [Section 64(1A)]

Income of a minor child would be clubbed in the hands of the parent whose income is higher before such clubbing. In case of a child whose parents marriage does not subsist, the income would be included in the hands of such parent who is maintaining the child. Accordingly, in case of such clubbing of income, the parent can claim an exemption u/s 10(32) of the Income Tax of Rs. 1,500 per annum per child. However, no such clubbing provisions would be attracted in case the income accruing to the child is on account of any manual work done by him or activity involving application of his skill, talent or specialized knowledge and experience or the minor child is suffering from specified disability.

(v) Income arising to spouse /son’s wife from asset transferred for inadequate consideration [Section 64(1)(iv)/(vi)]

When an asset is transferred to spouse / son’s wife without consideration or for inadequate consideration, then the income arising from such asset shall be clubbed in the hands of the transferor. It is pertinent to note that if an asset is transferred to spouse under an agreement to live apart, then even if such transfer is for inadequate consideration, clubbing provisions will not apply. Also, in order for the clubbing provisions to apply, the relationship between the husband and wife or mother/father-in-law & daughter-in-law should exist at the time of transfer of asset as well as at the time of generation of income.

(vi) Asset Transfer to HUF [Section 64(2)]

In case of any taxpayer being a member of a HUF transfers any property to the HUF for no/inadequate consideration, the income from such asset would be taxable in the hands of the transferor member and not in the hands of the HUF. Further in case of partition of the HUF where such asset is the subject matter of partition, the income derived from the said asset as received by the spouse of transferor would be clubbed in the hands of the transferor member.

(vii) Income arising to any person from asset transferred for the benefit of spouse / son’s wife [Section 64(1)(vii)/(viii)]

When an asset is transferred to any person or association (for the benefit of spouse / son’s wife) for no/inadequate consideration, then the income arising on such asset will be clubbed in the hands of the transferor.

Things to know about ITR filing in cases where clubbing of income provisions are applicable

Surana says, "Since clubbing is attracted in the aforementioned cases, every taxpayer should take the same into consideration while arranging or dealing in transactions for the purpose of tax management. Apart from the same, every taxpayer should consider the following factors at the time of furnishing of the tax return:

Determination of Correct ITR

Every taxpayer has to provide for his own income as well as income clubbed in his hands, if any, while furnishing his tax return for the year. Hence, the taxpayer in whose hands income of any other person is being clubbed, should determine correct ITR Form after taking into consideration the nature of income being clubbed. For instance, a salaried taxpayer is required to file his return in ITR 1, however, after the clubbing provisions being attracted, the person may be required to furnish his return in any other ITR depending upon the nature of clubbed income. This is vital since furnishing the return in a wrong ITR Form may render the same to be null and void.

Claiming TDS Benefit on Clubbed Income

The taxpayer in whose hands the income is being assessed on account of clubbing, may file a declaration to the tax deductor for deducting the TDS in his name in accordance with Rule 37BA of the Income Tax Rules. Accordingly, he may be able to claim the TDS on the income which is clubbed in his hands. Also it is notable that, in the relevant income tax forms, the schedule on TDS has been appropriately amended to also include the TDS deduction on the PAN of any other person.

In accordance with the clubbing provisions, where the asset transferred in question is converted into other form, the income derived from such converted asset would also be clubbed. However, clubbing provisions are not applicable on second generation income.

The term ‘income’ includes losses as well. Therefore, clubbing provisions would also be applicable in case of losses even though applicability of the same may go on to reduce the tax payable.

When is wife's income clubbed with husband's and vice-versa?

Gupta says:

• If you transfer an income-generating asset to your spouse without proper compensation, any income from this asset will still remain taxable in your hands.
• If your spouse works in an organisation where you own any substantial stake (around 20 per cent or more), their salary could be clubbed with your income unless they have the necessary professional or technical qualifications for the said job/role.

Gupta shares some exceptions to the clubbing of income provisions in case of income on assets transferred from husband to wife or vice versa. She says,

• If the transfer of asset is for adequate consideration;
• If the transfer of asset is in connection with an agreement to live apart;
• If the asset is transferred before marriage, no income will be clubbed even after marriage, since the relation of husband and wife should exist both at the time of transfer of asset and at the time of accrual of income.