ANALYSE THE CONDITIONS OF CLUBBING INCOME

Submitted by

Sivaganga.S.R

B.A. LL.B.(Hons.)(4TH Year VIII th Semester)

Submitted to

Mr. Yashvir

Reg.No: 46017210013

8TH APRIL 2021

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 Table Of Contents

SL.NO CONTENTS PAGES

1. DECLARATION 3
2 ACKNOWLEDGEMENT 4
3. INTRODUCTION 5
4. When will Clubbing of Income is applicable? 5-8
5. In which cases clubbing of income is not applicable? 8
6. In which cases clubbing of income is not applicable? 9

DECLARATION

I undersigned Sivaganga.S.R student of B..A. LLB (Hons.)(SEM- VII), hereby declare that the
project is my own work and has been carried out under the guidance and supervision of
Ms.Yashvir Singh of SRM University, Sonepat, Haryana,Delhi– NCR.

This work has not been previously submitted to any other university for any purpose.

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Date:08/04/2021 Name & signature of candidate :Sivaganga.S.R

ACKNOWLEDGEMENT

This project would not have been possible without the essential and gracious support of
Mr.Yashvir Singh (Assistant Professor of Taxation Law) from SRM University, Sonepat,

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Haryana, Delhi– NCR. His willingness to motivate me contributed tremendously to my project. I
also would like to thank his for showing me some examples related to topic of this project.

Besides I would like to thank the authorities of SRM University, Sonepat, Haryana,Delhi– NCR
and faculties of Law department for providing me good environment and facilities to complete
this project.

Last but not the least, I would like to thank my family and friends for their understandings and
supports towards me for completing this project.

INTRODUCTION

Under the Income Tax Act, 1961, an individual is taxed on his own income at predetermined
rates depending on his age and his total net taxable income. But in certain cases where
individuals who have more income and are taxed at a higher rate might disclose some of their
income through their close dependants like children or spouse. This can lead to such income

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being exempt or being taxed at a very lesser rate. Generally the Clubbing of income means
including the income of any other person in Assessee's total income. The Income-tax Act has
specified certain cases where income of one person is statutorily required to be included in the
income of another person if some conditions are satisfied. This inclusion is known as “Clubbing
of Income”.For Example, if a husband diverts some part of his income to his wife to reduce his
tax burden. Then, such transferred income of a wife is added and taxed as income of husband
only and not his wife.The clubbing provisions are applicable even if there is no intention to
reduce tax liability

When will Clubbing of Income is applicable ?

There are different scenarios under which provision of Clubbing of Income applies and they are:

 Transfer of Income without Transfer of Asset [Section 60]

When a person transfer the income without transferring the ownership of the assest from
which such income is earned. Then, such income will be taxable in the hands of
transferor. Most popular examples that we see is the rental income , when the owner of
the property asks his tenant to make the rental payments in his/her parents/wife or
children name.
Let us explain to you with a simple example: Ashish owns a house in Jaipur and is
earning rental income of Rs 20,000 p.m. on this. But, in order to save tax, he asked his
tenant to make a rental payment in his wife's bank account. In this case though the
income is received in a wife account, it will be taxed to Ashish as he transferred the
income source without transferring the legal ownership of the house.
People often do tax-planning by transferring income to their family members by way of
first drafting an agreement for transfer of income without the legal ownership transfer of
assets and then take rental cheques in their family name . However, this is not sufficient ,
income tax clubbing provisions will still be applicable.
 Revocable Transfer of Asset [Section 61]
When a person transfer an asset to another person keeping a clause in the transaction
which empowers transferor to take back the ownership anytime in future. Such a situation
is called Revocable Transfer. As per provisions of Clubbing of Income, when a
“revocable transfer” of asset is made then any income from that asset shall be taxable in
hands of transferor. [Transferor: person who transfers the asset. Transferee: person who
receives the asset.]
For instance, Karan transferred his house property to Arjun. There is a condition in
agreement that asset will transfer back to Karan after 2 years. Now, as per clubbing of
income, any income arising to Arjun from such house during 2 years will be included in
Karan’s income only.
Till now, we have understood the basic provisions in Clubbing of Income. Let us dive-in
further and discuss Clubbing of Income in case of spouse, son’s wife, minor child and
HUF.
 Clubbing of Income of Spouse [Section 64(1)(ii), 64(1)(iv), 64(1)(vii)]
In common parlance, the easiest way to save tax is practiced by transferring income in the
name of your spouse. There are very special provisions to regulate such transfers. All the
different scenarios are discussed as below.

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o Your spouse works in a concern/entity in which you have substantial interest.
There are 2 aspects in this situation, discussed as below:

Your spouse is Provision of Clubbing of Income will not apply. In

employed because of other words, that remuneration will be taxable in the
his/her professional/ hands of your spouse only. For e.g. You are partner in
technical a firm and entitled to 40% share in profits of the firm.
qualification. Your wife is employed in the same firm as general
manager and getting Rs 20,000 p.m. due to her
professional capacity then such income shall not be
clubbed in your hand.

No such Any remuneration received by your spouse from such

professional/ concern/ entity shall be clubbed and taxable in your
technical hands only.
qualification.

o When you and your spouse receive remuneration from a concern and both
have substantial interest in that concern : In such case, remuneration of both
will be clubbed in hands of that spouse whose income excluding such
remuneration is higher. However, as per common view, if both spouse are earning
remuneration due to their professional competence then provisions of clubbing
shall not apply.
Note : Substantial interest means when you are entitled 20% or more share of
profits (in case of firm) or not less than 20% voting power (in case of company) at
any time during the year.
o If you have transferred any asset to your wife without adequate
consideration : It is a very common practice, where a husband transfers an
income earning asset in his wife’s name to save tax. These provisions have been
introduced to target such tax avoidance practices.In this case, income from such
assets shall be taxable in your hands. This provision of clubbing of income will
not apply in case.
A . the asset is transferred for adequate consideration or
B. as a condition of divorce or
C. it was transferred before marriage.
o The nature of transferred gift is changed by the transferee : Sometimes it is
seen that a gift transferred which was not taxable previously is further invested in
a source such that it starts yielding income. In all such instances where nature of
asset is changed by the transferee spouse provisions of section 64(1)(iv) are
attracted and clubbing of income takes place. Read the Taxability of gifts
Example:
Mr Sharma gifted his wife Rs 5,00,000. The wife invests this amount in a FD and
starts earning an interest on the same. WIll this interest income be taxable in the
hands of Mr Sharma?

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 Since a gift of Rs 5,00,000 has been made to a relative it will not be taxable. But
the interest earned on FD will be taxable in the hands of Mr Sharma as per the
provisions of section 64(1)(iv). The clubbing provisions will be attracted as the
form of asset transferred has been changed by the transferee i.e. Mrs Sharma.
o Any transfer of asset made to a third person or AOP : Such transfer must have
been done without consideration or with inadequate consideration to ultimately
benefit your spouse now or at some later time. Such routing of assets to defer the
benefit from assets to your spouse will also be covered under the ambit of
clubbing provisions.
 Clubbing of Income in case of Son’s Wife [Section 64(1)(vi),64(1)(viii)]
Clubbing of income provisions also apply in case of any transfer of income made to your
daughter-in-law. The situation is discussed as below.
Asset has been transferred to your daughter-in-law without any proper consideration : In
this case, any income generating from that asset will become taxable in your hands.
For e.g. you have, 10,000 10% Debentures of Rs 100 each which you have transferred to
your daughter-in-law without any consideration. Now interest income of Rs 1,00,000 will
be included and taxable in your hands.
Asset has been transferred to some other person or AOP to ultimately defer its
benefits to your daughter-in-law :
In such a case when these transactions are carried out without any proper consideration
just to route the income tax liability to other hands, it is closely monitored by the Income
Tax Department and is added back to your income as per the clubbing of income
provisions.
 Clubbing of Income of Minor Child [Less than 18 years] [Section 64(1A)]
Any income earned by a minor child is clubbed in the hands of either of his/her parents,
whose income (excluding minor child income) is greater. For example, a Fixed deposit
taken in the name of a minor child, the interest earned Will be clubbed with the income of
the highest earning parent. However, as per Income Tax provisions there are certain
situations in which the clubbing of income provisions will not apply. These are:
o When minor child is suffering from any disability as mentioned in Sec 80U, or
o When income is earned by minor child through manual work, or
o Income earned by minor child through his skill, talent, knowledge etc. For e.g.
minor child wins money on TV shows like Indian Idol Junior winner, Voice India
Kids etc.

Moreover, an exemption of Rs 1500 is provided u/s 10 (32) on income earned by each

minor child to the the parent under which the minor’s income is being clubbed.
Do not forget to claim this exemption folks!

 Clubbing of Income of Major Child

There are many people who ask, what about income earned by his/her major child? There
is no need for a special provision in such a case. A major child is governed by the
principles applicable to an individual up to 60 years of age. So, if your major child is
earning income above Rs 2,50,000 (before any deduction), Then he is liable himself to
file his income tax return. No clubbing of income provisions shall apply.
There might arise a situation where the child was minor but attained the status of major in

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 the same financial year. In such a case income would be clubbed until such child was
minor and not for the remaining part of the year.
 Clubbing of Income & HUF [Section 64(2)]
Existence of Hindu Undivided Family has been since ages. Income Tax provisions also
recognize HUF as an assessee. In simple terms, an HUF is also liable to file income tax
return. To read about HUF as an assessee, Hence, it’s obvious that clubbing of income
provision is also attracted in case of HUF.
If any of your personal assets has been transferred to the HUF without any adequate
consideration: In such case, all income from such asset shall be taxed in your hands.
In case of split of HUF in future the distributed property in your spouse hands will be
clubbed with your income. For e.g. you have a house from which rental income of Rs
5,00,000 p.a. is earned by you. When you transfer this house to HUF without
consideration or inadequate consideration then income of Rs 5,00,000 will be taxed in
your hands only.

In which cases clubbing of income is not applicable?

 Income transferred before marriage :

Any asset or gift given to would be wife before the wedding will not be considered under
the clubbing provisions. 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.
 Income derived from clubbed income :
Except in case of minor when asset is transferred to spouse or daughter-in-law (son’s
wife), any further income derived from the income generated shall not be clubbed. For
eg: Mr X transferred an amount of Rs 5,00,000 to his wife. This amount is invested in an
10% FD, thus, the interest of Rs. 50,000/- which will be taxable in hands of Mr X as per
clubbing provisions of the income tax act. Any income further generated by Mrs X using
this interest amount will not be taxable in the hands of the husband. For example, Mrs X
further invested this interest of Rs. 50,000/- and earned the interest of Rs. 5,000/-. This
Rs. 5,000/- will not be taxable in the hands of the Husband, this will be taxable in the
hands of wife only.
 Saved money is not asset transferred :
Any amount saved by the wife from money given for meeting daily or household
expenses will not be covered under the ambit of clubbing provisions.

How to avoid clubbing of income ?

Following are some methods, which are used to magnify the income tax savings:

 Gift money to your wife or daughter-in-law before marriage:

If your wife/ daughter-in-law is not working, and having no income then you can save

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 income up to Rs 2,50,000. But it is imperative to note that, this can be done only before
marriage. If you give any money after marriage then clubbing provisions shall apply.
 Pay rent & save money:
If you are living with your parents and the house is in their name. Then you can pay rent
to them and claim exemption of house rent allowance. Also, if you parents do not earn
any other income, they can claim further benefit. They will fall within basic exemption
limit and will have to pay less income tax.
 Health insurance of family members:
You can further claim deduction u/s 80D by getting a health insurance for your family.
Maximum deduction which can be claimed is Rs 25,000 for individual and his/her spouse
and children. When you pay premium for your parents who are senior citizen then the
maximum deduction will be of Rs 50,000. Further, the deduction can be claimed for
medical expenditure incurred for senior citizen parents also. It is within the limit of Rs
50,000
 Prefer Loan over gift:
You can give your spouse loan at lower interest rates as there is no official rule
prescribed for describing interest rates in such cases. The only catch here would be to
keep it documented and loan repayment should be made through traceable mode like
banking channels. This will shift the tax liability in your spouse's hands and no clubbing
would be done. However, it must be analysed properly on the basis of all relevant factors.
 Investments through Joint Account:
While opening a joint account make sure the primary holder is the one having lower tax
liability. Since, in case of joint holding the taxability of interest income arises in the
hands of the primary holder it can help you save on taxes. Also, the withdrawals will be
treated in the nature of gift to relatives which is again taxfree.
 Investment in the name of a Non-working wife:
An income earned on the amount invested or transferred to your spouse will be clubbed
but not the further income earned on such income. For example Suppose you took a
house on name of your wife, rental income from such house say Rs 50,000 will be
clubbed but if the house is in name of your wife then further income generated by
investing this rental income of Rs 50,0000 will not be taxable in your hands.