EXPLAINED | What clubbing of income really means in your income tax return (ITR)

July 31 is the last date to file income tax returns without a late fee for the financial year 2022-23. As the deadline for filing income tax returns nears, a lot of taxpayers may be confused by the rules and regulations regarding the process. One such aspect is clubbing of income. This provision happens when an individual’s income is clubbed with another’s taxable income. Let us understand in detail what the term refers to, which provisions it comes under and what it entails.

What is clubbing of income?

According to the Income Tax Department, in some special cases, a person’s income is included (clubbed) in the taxable income of a taxpayer. In this case, the taxpayer will have to pay tax on their own income (if any) and the income of the other individual as well. This is called clubbing of income.

Sections 60 to 64 of the Income Tax Act include provisions related to clubbing of income. The provision is applied in case of transfer of income without transfer of asset, remuneration received by spouse/minor child (in certain conditions) and others.

Do any clubbing provisions exist in case of transfer of income without transfer of asset?

“If a person transfers income from an asset owned by him without transferring the asset from which the income is generated, then the income from such an asset is taxed in the hands of the transferor,” states the Income Tax Department. This means that if a person transfers the money earned from the asset, without transferring the asset itself, the tax will be deducted from the individual who transfers the income.

Do any clubbing provisions exist if there is a revocable transfer?

If an individual exercises control/right over the asset transferred or over the income from it, whether directly or indirectly, the tax will be deducted from the income of the transferor.

Can remuneration received by spouse of an individual be clubbed with his/her income?

In certain cases, the income of the spouse is clubbed in the taxpayer’s income. This happens when the spouse of the individual is employed but the remuneration is not justifiable (for example, the person does not have technical or professional knowledge or experience).

If a person has substantial interest in any concern, or their spouse is employed in the same concern, then clubbing of income takes place. As per the Income Tax Department, substantial concern is defined as when an individual, either alone or along with their relatives, “beneficially holds at any time during the previous year 20% or more of the equity shares (in case of a company) or is entitled to 20% of profit (in case of concern other than a company).”

Can income from assets transferred to spouse without adequate consideration be clubbed with the income of transferor-spouse?

In case a taxpayer transfers their asset (other than house property) to their spouse otherwise than for adequate consideration, income from the asset will be clubbed with the income of the transferor.

Can income from assets transferred to son’s wife without adequate consideration be clubbed with the income of the transferor, i.e., father-in-law/mother-in-law?

If the income from assets is transferred without adequate consideration, the clubbing provision will apply in case of the daughter-in-law as well. The income from the asset will be clubbed with that of the transferor. The provision will not apply if the income was transferred before the marriage.

Can income from assets transferred to any person for the benefit of spouse?

If any person transfers assets (directly or indirectly) otherwise than for adequate consideration to an individual or a group for the benefit of his/her spouse,  then income arising from the asset will be clubbed with the income of the transferor. The case applies both in terms of immediate and deferred benefits.

Are there any situations in which the clubbing provisions do not apply in case of income from assets transferred to spouse?

In certain cases, clubbing of spousal income will not happen. For example, clubbing of income will not happen if the asset is transferred before marriage. If the marriage did not happen till the date of accrual of income, if the asset is for due consideration or if the move is in connection to living apart, the income will not be combined.

Is a minor child’s income clubbed with the income of a parent? 

If a minor child earns money on account of manual work or through his/her skill, knowledge or talent, the money will not be clubbed with the income of his/her parents. But, accretion from such income will be clubbed with the parent whose income is higher. In this case, parents can claim an exemption under section 10(32) of Rs 1,500 or the income of minor clubbed, whichever is less.

Will any clubbing provision apply in case of transfer of assets to Hindu Undivided Family (HUF) by its member?

If a member of the HUF transfers their property to the unit, otherwise than for adequate consideration, or converts the asset into the property belonging to the HUF, then clubbing provisions will apply. Before the partition of the HUF, the entire income from the property will be clubbed with the income of the individual making the transfer. After partition of the HUF, the income derived from the asset by the spouse of the transferor will be included with the income of the taxpayer and taxed accordingly.