Clubbing of Income — Sections 60 to 64 of Income Tax Act Explained

Tax planning sometimes involves transferring assets or income to family members in lower tax brackets to reduce overall family tax liability. To prevent such tax avoidance, the Income Tax Act has "clubbing of income" provisions under Sections 60 to 64 — which require the transferor's income to be included in the income of the transferor (or another specified person) regardless of who actually received it. Here is the complete guide.

Section 60 — Transfer of Income Without Transfer of Assets

If a person transfers income from an asset without actually transferring the asset (e.g., directing rental income to be paid to a third party while retaining ownership of the property), the income continues to be taxable in the hands of the transferor — not the recipient.

Section 61 — Revocable Transfer of Assets

If a person transfers an asset to another party under a revocable arrangement (where the transfer can be undone), income from that asset is clubbed with the transferor's income. Only genuinely irrevocable transfers escape clubbing under this section.

Section 64(1)(ii) — Spouse's Income Clubbing

Income of a spouse from remuneration received from a concern in which the taxpayer has "substantial interest" (>20% voting power or profit share) is clubbed with the taxpayer's income. Example: Husband owns 25% in a company; wife receives salary from the same company — that salary is clubbed with the husband's income (if skill and technical expertise are not the reason for wife's employment).

Section 64(1)(iv) — Gifting to Spouse

Income from assets (other than house property) transferred directly or indirectly to a spouse for inadequate consideration (gift or below-market transfer) is clubbed with the transferor's income. Example: Husband gifts ₹5 lakh to wife; she earns FD interest of ₹40,000 — this interest is added to the husband's income, not the wife's.

Section 64(1A) — Minor Child's Income

• Income of a minor child (below 18) is clubbed with the income of the parent who has higher income
• Exception: Income earned by a minor from any manual work, or from any activity involving the application of the minor's skill/talent — NOT clubbed
• Exemption: The parent in whose hands the income is clubbed gets an exemption of ₹1,500 per minor child per year under Section 10(32)

Section 64(2) — HUF Income Clubbing

If a member of an HUF converts his individual property into HUF property without adequate consideration, the income from that property is clubbed with the individual member's (karta's) income — not treated as HUF income. This prevents individuals from shifting individual income into the HUF to benefit from the HUF's lower tax slab.

Conclusion

Clubbing provisions ensure that artificial income splitting within families doesn't reduce the overall tax burden. SPOTON provides expert advice on family tax planning — identifying legitimate strategies while ensuring compliance with Sections 60-64. Contact us for comprehensive income tax advisory services.