Income Tax Taxation

Income Tax Provisions for Clubbing of Income

There are many situations in which you have to club income with someone else. Clubbing provisions are governed by Section 64 of the Income Tax Act,1961. Clubbing means clubbing the income which you have earned with someone else. If you are planning to transfer an asset to any person with regard to tax planning. It’s better to understand the clubbing provisions as provided in the Income Tax Act, 1961.

We will understand these provisions with the following points:

• What is the clubbing of Income?
• Definitions and what are the sections covered in clubbing provision?
• What is Section 64?
• Additional Information
• Conclusion

What is the clubbing of Income?

As the name suggests, clubbing of income means adding or including the income of another person which includes mostly family to one’s own income. Clubbing is allowed in Section 64 of the Income Tax Act, 1961^[1]. However certain restrictions pertaining to specified are mandated to discourage the practice of UN due advantage.

Definitions and what are the sections covered in clubbing provision?

Various Definitions are mentioned in these provisions which are as follows:

1. Minor: Individual whose age is below 18 years of age I called a minor.

• Major: An individual whose age is above 18 years is known as major. A Major is liable to pay the taxes by himself.

• Transferor: An Individual who transfers his asset to another individual is called as a Transferor.

• Transferee: An Individual on whose name the asset is transferred is called as a Transferee.

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Section covered under Clubbing of Income:

Sections	Description
Section 60	Allocation of Income without transfer of asset
Section 61	Revocable Transfer of Asset
Section 62	Revocable Transfer of Asset for a specific period
Section 63	Transfer and Revocable transfer defined
Section 64	Income od an individual to include Income of Spouse, Minor Child
Section 65	Liability of person (transferee) in respect of income included in the income of another person (the transferor)

What is Section 64?

Section 64 covers all the provisions which are applied to an individual who is liable to pay taxes on the income along with the income of the spouse and the minor child.

Section 64 basically three sections:

1. Section 64(1)
2. Section 64(1A)
3. Section 64(2)

Let’s discuss them in detail:

1. Section 64(1)

• Section 64(1)(ii): Spouse Income Inclusion:

If an individual is earning salary income and his or her spouse or his relatives hold a minimum of 20% of the shares in that organization. In such a case the salary of the individual shall be taxable income of his or her spouse.

If an individual as well as the spouse along with the relatives of the spouse together hold a minimum of 20% of the shares of that organization. In such a case taxable income shall be a higher amount of the salary earned by anyone of them out of the two.

If an individual whose income is clubbed with his or her spouse or relatives of the spouse having a technical or professional. In such a case clubbing of income is not required. Both the taxpayers are required to file their income and pay their taxes on their respective incomes.

Here the relatives include husband, wife, brother or sister or any lineal ascendant or descendant of the individual.

• Section 64(1)(iv):

If an individual has transferred an asset to his or her spouse without any adequate consideration then the income/profit generated from an asset such as this is taxable income in case of an individual, both of them are not supposed to live away from each other.

However, in the following circumstances there will not be clubbing of income:

1. Assets transferred before marriage
2. Assets transferred for adequate consideration
3. Assets transferred in connection with an agreement to live apart
4. On the date of accrual of income, the transferee is not the spouse of the transferor.
5. The spouse acquires property out of pin money (an allowance given to the wife by her husband to meet the day to day expenses)

• Section 64(1)(vi):

If an individual has transferred an asset to his or her son’s wife without any adequate consideration then the income or profit generated from such an asset shall be taxable income of that individual.

• Section 64(1)(vii):

If an individual has transferred the asset to a third person for the benefit of his or her spouse without any adequate consideration then the income or profit generated from such an asset as his taxable income of that individual.

• Section 64(1)(viii):

If an individual has transferred an asset to a third person for the benefit of his or her son’s wife without any adequate consideration then the income or the profit generated from the asset shall be taxable income of that individual.

2. Section 64(1A): Minor Income Inclusion:

i. While computing the taxable income of an individual, the income of the minor child shall be clubbed.

ii. The income of the minor child shall be clubbed in the hands of the parents whose total income is greater after excluding the minor’s income.

iii. Also, in the case where the marriage of the parents does not subsist, the income shall be clubbed in the hands of the parent who is maintaining the minor during the previous year.

iv. Where any income is once clubbed in the total income of one parent, any such income arising in the succeeding year will be clubbed in the income of the same parent unless the assessing officer is satisfied it should be clubbed in the hands of another parent.

v. Further deduction up to RTs.1500 per minor shall be allowed against such income which is clubbed in the hands of the parent.

vi. However, income will not be clubbed in the following situation:
• Manual work was done by the minor.
• Activity involving the application of skill, talent or specified knowledge or experience.
• Any income or minor child who is suffering from disability of the nature specified in Section 80U

3. Section 64(2): Inclusion of income self-occupied into joint family property

Where an individual who is the member of the HUF coverts his individual property as the property of the HUF or transfers the property into the common stock of the family without any adequate consideration then the income generated from such property will be the taxable income of that individual.

If the converted property is then partitioned among the members of the family the income from such converted property is receivable by the spouse and the minor child of the taxable in the hands of the transferor.

Income from the accretion of assets: In the cases mentioned above the income arising to the transferee from the property transferred is taxable in the hands of the transferor. However, such income arising by the transferor from such income is not includible in the total income of the transferor.

Additional Information:

• If it is found that the registered parent of the minor has a lower income than the other parent, the assessing officer will give an order to club the income whose income is greater.
• If an asset has generated losses then such loss will be added in the income of the transferor or the parent with the higher income. However, the loss will be included even if the asset is in the name of the minor also.
• Savings done by the wife for household chores will not be clubbed in the hands of the husband.
• When grandparents gift their grandchildren some money it will not be clubbed as it is considered as a cross gift.

Conclusion:

The complete provision of Section 64 covers clubbing of income of an individual with his spouse and minor child. If you want to file your return with a view to minimizing the tax liability including clubbing provisions then you are at the right place. For more information, speak to our Tax Expert or visit www.enterslice.com

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