Taxation Matters : Clubbing of Income

I have come across various cases where a taxpayer starts reflecting the receipt of rent of his house property in the name of his wife while the ownership of the house continues to be in the name of the taxpayer. Similarly, in some cases, the dividend and sale proceeds of shares owned by a taxpayer were transferred to the bank account of a spouse. In both the above cases, the taxpayer did not include the income (rent/dividend/capital gain) while calculating his tax liabilities. This type of transaction diverts the income to someone else to save on taxes. The Income Tax Law provides for the clubbing of income of such transactions in the hands of the taxpayer. 

Therefore, it is important for any taxpayer to understand the provisions relating to the clubbing of income to avoid incorrect computation of his / her tax liabilities. The clubbing provisions are covered under Sec 60 to 64 of the Income Tax Act and contain provisions under the following categories:-

1. Transfer of Income without transfer of the asset (Sec 60).  The income will be clubbed in the hands of the transferor who transfers the income.

2. Revocable Transfer of Asset (Sec 61), where a transfer can be revoked / asset transferred back subsequently.    The income will the clubbed in the hands of the transferor who transfers the income.

3. Salary / Fee / Remuneration paid to spouse from a concern where the individual has 'substantial interest' {Sec 64 (1) (ii)}. The income will be clubbed in the hands of the spouse whose total income is higher. The substantial interest here means more than 20% voting power or share of profit.

4. Transfer of assets to the spouse (directly or indirectly) without adequate consideration {Sec 64 (1) (iv)}. The income will be clubbed in the hands of the transferor who transfers the asset. In connection with this provision, if the taxpayer gifts cash to the spouse who in turn invests it in an asset, the income arising out of such asset will also be taxed in the hands of the taxpayer who gifted cash. However, if the transfer of the asset to the spouse is under an arrangement to live apart, it will not attract clubbing provisions.

5. Transfer of Assets to Son's Wife without adequate consideration {Sec 64 (1) (vi)}. The income will be clubbed in the hands of the transferor who transfers the asset.

6. Transfer of asset to a Person / Association of Persons for Immediate or Deferred Benefit to Spouse / Son's Wife {Sec 64 (1) (vii) & (viii)}. The income will be clubbed in the hands of the transferor who transfers the asset.

7. Income earned by a minor child, including stepchild {Sec 64 (1A)}. The income will be clubbed in the hands of the parent who has the higher income. However, income earned by the child on account of manual work or any activity involving the application of his / her skills/knowledge/talent/experience will not be so clubbed. 

The above provisions clearly indicate the conditions under which the income of another person/spouse/son's wife/child will be included in the income of the taxpayer. Non-compliance could attract additional tax, interest and penal consequences.