Clubbing of Income (Sections 60 to 65)

Home   /   Clubbing of Income (Sections 60 to 65)

Income-tax is levied on a slab system on the total income of an individual. There are progressive rates of tax  and as the income goes up, the rates of tax also go up. At present, the income-tax rates start from a minimum of  10% and go up to 30%. There is a tendency amongst the tax-payers in higher tax brackets to divert a part of their  income to the hands of their relatives, in order to reduce the burden of tax.

It may, therefore, be observed that by diverting the income into different hands, he is able to make a  substantial reduction in the tax liability. In order to curb such practices of tax avoidance, provisions have been  incorporated in the Income-tax Act under which the income arising to certain persons is to be included in the  income of another person, for purposes of computation of his tax liability. These provisions are contained in  sections 60 to 64 of the Income-tax Act. 

These provisions are of 2 types: 

(A) Income of other persons included in an assessee’s total income [Sections 60 to 63]; or 

(B) Income of other person included only in the individual’s total income [Section 64]

Clubbing of Income-Section 60 to 65
Clubbing of Income-Section 60 to 65

Table of Contents

1. Transfer of Income without the Transfer of Assets [Section 60] 

Where there is a transfer of an income by a person to another person, without the transfer of the asset from  which the income arises, such income shall be included in the total income of the transferor, whether such transfer  is revocable or not and whether this transfer is effected before or after the commencement of the Income-tax Act,  1961.

For example:

X who owns a house which fetches a rent of ₹20,000 per month, declares that henceforth the rent shall belong to his friend Y but the house shall remain the property of X. In this case, because there is only a transfer of income without the transfer of the asset, the rental income shall be included in the income of X for purposes of computing his total income.

2. Revocable Transfer of Assets [Section 61] 

By virtue of section 61, if an asset is transferred under a “Revocable Transfer”, income from such asset is taxable in the hands of the transferor.

The Transfer for sections 60, 61 and 62 for this purpose includes any settlement, trust, covenant, agreement or arrangement.

(A) Examples of Revocable Transfer with different situations:

In the following cases, a Transfer is a Revocable Transfer:

SituationsExample
Situation 1 – If an asset is transferred under a trust and it is revocable during the lifetime of the beneficiary.X transfers a house property to a trust for the benefit of A and B. However, X has a right to revoke the trust during the lifetime of A and/or B. It is a revocable transfer and income arising from the house property is taxable in the hands of X.
Situation 2 – If an asset is transferred to a person and it is revocable during the lifetime of transferee.X transfers a house property to A. However, X has a right to revoke the transfer during the lifetime of A. It is a revocable transfer and income arising from the house property is taxable in the hands of X.
Situation 3 – If an asset is transferred before April 1, 1961 and it is revocable within six years.X transfers an asset on March 31,1961. It is revocable on or before June 6,1963. It is a revocable transfer. Income arising from the asset is taxable in the hands of X. Conversely, if X transfers an asset before April 1,1961 and it is revocable after 6 years (say, on April 10, 1967), it is not taken as a revocable transfer.
Situation 4 – If the transfer contains any provision to re-transfer the asset (or income therefrom) to the transferor directly or indirectly, wholly or partly.X transfers an asset. Under the terms of transfer, on or after April 1, 1998, he has a right to utilize the income of the asset for his benefit. However, he has not exercised this right as yet. On or after April 1, 1998, income of the asset would be taxable in the hands of X, even if he has not exercised the aforesaid right.
Situation 5 – if the transferor has any right to reassume power over the asset (or income therefrom) directly or indirectly, wholly or partly.X transfers an asset. Under the terms of transfer, he has a right to use the asset for the personal benefits of his family members whenever he wants. Till date, he has not exercised this right. It is a revocable transfer. The entire income from the asset would be taxable in the hands of X.

(B) When a Transfer is Revocable [Section 63]:

As per section 63, a transfer for the purpose of sections 60, 61 and 62 shall be deemed to be revocable if:

  1. it contains any provision for the re-transfer, directly or indirectly of the whole or any part of the income or assets to the transferor, during the life time of the beneficiary or the transferee as the case may be, or
  2. it gives the transferor a right to re-assume power directly or indirectly over the whole or any part of the income or assets during the life time of the beneficiary or the transferee as the case may be.

(C). Section 61 Not applicable, if the transfer is Irrevocable for a specified period [Section 62]:

As per section 62(1), the provisions of revocable transfer, discussed in section 61, shall not apply in certain circumstances. Such circumstances are—

(a) in the case of transfer by way of trust, the transfer is not revocable during the life time of the beneficiary;

(b) in the case of any other transfer, the transfer is not revocable during the life time of the transferee;

(c) in case the transfer is made before 1.4.1961, the transfer is not revocable for a period exceeding 6 years.

The above exceptions are applicable provided the transferor derives no direct or indirect benefit from such income.

In the above cases, the income shall be taxable in the hands of the transferee.

Although in case of transfer mentioned as per section 62 in clauses (a), (b) and (c) above, the income from such assets transferred shall not be taxable in the hands of transferor as it is not treated as revocable transfer, but it will be chargeable to income-tax as the income of the transferor as and when the power to revoke the transfer arises and shall then be included in his total income. [Section 62(2)]

Example:

R transfers his house property to a trust for the benefit of G till his death. In this case, this transfer is irrevocable till the death of G. Thus, till the death of G, the income from this house property shall be taxable in the hands of the transferee i.e. the trust.

However, on the death of G, the income from such house property shall be included in the total income of R as on that date the transfer has become revocable. 

In the above case, if R had reserved a right to get back the house property or income therefrom from G during the lifetime of G, then, such transfer shall be revocable and income from such house property shall be taxable in the hands of R right from the beginning.

3. Remuneration of Spouse from a concern in which the other Spouse has Substantial Interest [Section 64(1)(ii)]:

Section 64(1)(ii) is applicable if the following conditions are satisfied—

  1. Condition 1 : The taxpayer is an individual.
  2. Condition 2 : He/she has a substantial interest in a concern.
  3. Condition 3 : Spouse of the taxpayer (i.e., husband/wife of the taxpayer) is employed in the above-mentioned concern.
  4. Condition 4 : Spouse is employed in the concern without any technical or professional knowledge or experience.

If the aforesaid conditions are satisfied, then salary income of the spouse will be taxable in the hands of the taxpayer.

In computing the total income of an individual, there shall be included all such sums as arise directly or indirectly to the spouse, of such individual by way of salary, commission, fees or any other form of remuneration, whether in cash or in kind from a concern in which such individual has a substantial interest.

Therefore, any remuneration derived by a spouse from a concern in which the other spouse has a substantial interest, shall be clubbed in the hands of the spouse who has a substantial interest in that concern.

Any other income, not specified above, is outside the scope of this section and will not the clubbed even if it accrues to the spouse from a concern in which the individual has a substantial interest.

(A) No Clubbing if Remuneration is due to Technical or Professional Qualifications:

The provisions of this clause shall not apply to any income arising to the spouse:

  1. on account of technical or professional qualifications possessed by the spouse, and
  2. the income is solely attributable to the application of his/her technical or professional knowledge or experience.

For example,

X is a partner in a partnership concern and is entitled to 50% share of the profit of the firm. Mrs. X is employed as the General Manager of the firm and is getting a salary of Rs.25,000 per month. The taxable salary of Mrs. X will be clubbed with the total income of X under the head ‘Income from salaries’. However, if Mrs. X is receiving the salary on account of her technical or professional knowledge or experience, then the salary would not be clubbed.

(B) Where both Husband and Wife have Substantial Interest and both are getting Remuneration from the concern:

If the husband and wife both have substantial interest in the concern and both are in receipt of remuneration from the concern, then the remuneration of both shall be clubbed in the hands of that spouse whose total income, before including such remuneration, is greater. In this case, the clubbing will be done for the first time in the previous year in which the following three conditions are satisfied:

  1. Both the husband and wife have a substantial interest in the concern.
  2. Both the husband and wife get remuneration from such a concern.
  3. The relationship of husband and wife subsists at the time of accrual of such income.

Where such income is once included in the hands of either spouse, any such income arising in any succeeding year shall not be included in the total income of other spouse unless the Assessing Officer is satisfied, after giving that spouse an opportunity of being heard, that it is necessary so to do.

Substantial Interest – Meaning

An individual has a “substantial interest” in any of the following two situations—

  1. In the case of a company – If an individual beneficially holds (individually or along with his relatives) 20 per cent (or more) of equity shares in the company at any time during the previous year.
  2. In the case of a concern other than company – If an individual is entitled to 20 per cent (or more) share in profit in the concern (individually or along with his relatives) at any time during the previous year.

When both Husband and Wife have Substantial Interest :

PositionIllustration
1. Both husband and wife have a substantial interest in a concern(and his relatives) holds 20 per cent equity share capital in A Ltd. Mrs. X (and her relatives) holds 20 per cent equity share capital in A Ltd.
2. Both are in receipt of the remuneration from such concernX and Mrs. X are employed by A Ltd.
3. Remuneration is received without any technical and professional qualification.They are employed in A Ltd. without any technical professional qualification.
4. Remuneration will be included in the total income of husband or wife whose total income, excluding such remuneration, is greater.Salary income of X and Mrs. X will be included in the income of X (if income of X before this clubbing is higher than that of Mrs. X).

If once clubbing is done in the hands of X, salary of X and Mrs. X will be included in the income of X (in the subsequent years), even if income of X is lower than that of Mrs. X in that year. In such a case, the Assessing Officer can club the income of X and Mrs. X in the hands of Mrs. X only if the Assessing Officer is satisfied that it is necessary to do so. The Assessing Officer can take such action only after giving Mrs. X an opportunity of being heard.

4. When an Individual is Assessable in respect of Income from Assets Transferred to Spouse [Section 64(1)(iv)]:

Section 64(1)(iv) is applicable if the following conditions are satisfied—

  1. Condition 1 : The taxpayer is an individual.
  2. Condition 2 :He/she has transferred an asset (other than a house property).
  3. Condition 3 :The asset is transferred to his/her spouse.
  4. Condition 4 :The transfer may be direct or indirect.
  5. Condition 5 : The asset is transferred otherwise than
    (a) for adequate consideration, or
    (b) in connection with an agreement to live apart.
  6. Condition 6 : The asset may be held by the transferee-spouse in the same form or in a different form.

If the above conditions are satisfied, any income from such asset shall be deemed to be the income of the taxpayer who has transferred the asset.

The income from asset transferred must be calculated in the same way as it would be if the asset has not been transferred. Exemption, Deduction or Tax Incentives in respect of such income can be claimed by the transferor.

When Clubbing of Income Under Section 64(1)(iv) is Not Applicable :

section 64(1)(iv) is not applicable in the following cases:

  1. If assets are transferred before marriage.
  2. If assets are transferred for adequate consideration.
  3. If assets are transferred in connection with an agreement to live apart.
  4. If on the date of accrual of income, transferee is not spouse of the transferor.
  5. If property is acquired by the spouse out of pin money (i.e., an allowance given to the wife by her husband for her dress and usual household expenses)

In the aforesaid five cases, income arising from the transferred asset cannot be clubbed in the hands of the transferor.

Appropriation when Transferred Asset is Invested in a Business

An asset (maybe in cash or kind) is transferred by husband to his wife (or vice versa) (directly or indirectly) without adequate consideration. She invests the asset in a business. The amount of income that will be clubbed in the hands of husband will be determined as follows—

  1. Step 1 : Find out total investment of transferee-spouse in the business on the first day of the previous year.
  2. Step 2 : Find out the amount invested by the transferee-spouse out of the assets transferred to her without adequate consideration by her husband on the first day of the previous year in the said business.
  3. Step 3 : Find out the taxable income (exempt income is not included) of the transferee-spouse from the business. If the transferee-spouse becomes a partner of a firm by investing the aforesaid asset then only interest income from the firm is considered under Step three. Share of profit from the firm is not considered under Step three as it is exempt under section 10(2A).
  4. Step 4 : The amount which shall be included in the hands of transferor is determined as follows—

Step 3 × Step 2 ÷ Step 1.

5. An Individual is Assessable in respect of Income from Assets Transferred to Son’s Wife [Section 64(1)(vi)]:

Section 64(1)(vi) is applicable if the following conditions are satisfied—

  1. Condition 1 : The taxpayer is an individual.
  2. Condition 2 :He/she has transferred an asset after May 31, 1973.
  3. Condition 3 :The Asset is transferred to his/her son’s wife.
  4. Condition 4 : Transfer may direct or indirect.
  5. Condition 5 : The Asset is transferred otherwise than for adequate consideration.
  6. Condition 6 : The Asset may be held by the transferee in the same form or in a different form.
  • If the above conditions are satisfied, then income from the asset is included in the income of the taxpayer who has transferred the asset.

For Example :

R transfers 1,000 10% bonds of Rs. 100 each of IDBI to his son’s wife without any consideration. IDBI declares Rs.10,000 as interest. Although the sum of Rs.10,000 as interest is received by his son’s wife, this amount shall be included in the income of R under the head ‘Income from Other Sources’ for the purpose of computing his total income.

Other Points ….

The following points should be noted—

  1. The relationship of father-in-law (or mother-in-law) and daughter-in-law should subsist both at the time of transfer of asset and at the time of accrual of income. It means transfer of asset before son’s marriage by an individual to his prospective daughter-in-law is outside the scope of clubbing even if income is accrued after son’s marriage.
  2. Transfer includes indirect transfer.
  3. For computation of income from transferred asset.
  4. For consequences when the identity of transferred asset is changed.

6. An Individual is Assessable in Respect of Income from Assets Transferred to a Person for the Benefit Of Spouse [Section 64(1)(vii)]

Section 64(1)(vii) is applicable if the following conditions are satisfied—

Condition 1 : The taxpayer is an individual.

Condition 2 : He/she has transferred an asset.

Condition 3 : The transfer may be direct or indirect.

Condition 4 : The asset is transferred to a person or an association of persons.

Condition 5 : It is transferred for the immediate or deferred benefit of his/her spouse.

Condition 6 : The Transfer is without adequate consideration

If the aforesaid conditions are satisfied then income from such asset to the extent of such benefit is taxable in the hands of the taxpayer who has transferred the asset.

In other words, where an asset is transferred to some other person, without adequate consideration for the benefit of the spouse of the individual as well as for some other persons, income on such an asset to the extent of benefit which accrues to the spouse, shall be included in the total income of the individual.

For example:

X transfers a house to his friend Y with a direction that 50% of the rental income is to be used for the benefit of his wife Mrs. X and 50% for others, then the rental income to the extent of 50% shall be included in the total income of X.

7. An Individual Is Assessable in Respect of Income from Assets Transferred to a Person for the Benefit of Son’s Wife [Section 64(1)(viii)]

Section 64(1)(viii) is applicable if the following conditions are satisfied—

  1. Condition 1 : The taxpayer is an individual.
  2. Condition 2 :He/she has transferred an asset after May 31, 1973.
  3. Condition 3 :The Asset is transferred to any Person or an Association Of Person (AOP).
  4. Condition 4 : Transfer may be direct or indirect.
  5. Condition 5 : The Asset is transferred for the immediate or deferred benefit of his/her Son’s Wife.
  6. Condition 6 : The Asset is Transferred otherwise than for adequate consideration.

If the above conditions are satisfied, then income from the asset to the extent of such benefit is included in the income of the taxpayer who has transferred the asset..

Section 64(1)(vii) and (viii) will be attracted if transferor makes a declaration of trust and appoints himself as the trustee.

8. Clubbing of Income of a Minor Child [Section 64(1A)]

All income which arises or accrues to the minor child shall be clubbed in the income of his parent [Section 64(1A)].

(1). Clubbing of Income of a Minor Child in the hands of Father or Mother –

The income of minor will be included in the income of that parent whose total income [excluding the income includible under section 64(1A)] is greater.

The following points should be noted—

1. The income shall be clubbed in the hands of that parent whose total income (excluding the income of the minor) is greater.

Where any income is once included in the total income of either parent, any such income arising in any succeeding year shall not be included in the total income of the other parent, unless the Assessing Officer is satisfied, after giving that parent an opportunity of being heard, that it is necessary so to do.

Example :

A is minor child of X and Mrs. X. During the previous year 2018-19, income of A is Rs. 2,500 (this is the first income of A during his life time). During the previous year 2018-19, income of X is higher than that of Mrs. X. Consequently, income of A will be included in the income of X for the previous year 2018-19. In the subsequent years (during the minority of A), income of A will be included in the income of X, even if income of Mrs. X is higher than that of X in any of the subsequent years.

However, there is one exception. If in the subsequent year, the Assessing Officer wants to include the income of minor child A in the hands of Mrs. X, it can be done only if it is necessary to do so and that too after giving an opportunity of being heard to Mrs. X.

2. Where the marriage of the parents does not subsist, the income of minor will be includible in the income of that parent who maintains the minor child in the relevant previous year.

3. The minor’s income, in case both the parents are not alive, cannot be assessed in the hands of the grandparents or any other relatives or even in the hands of minor.

4. Where the income of a minor child has been included in the total income of a parent, such parent shall be entitled to an exemption to the extent of such income or Rs.1,500 whichever is less, in respect of each minor child whose income is so included.

(2). Certain incomes of Minor Child Taxable in the hands of Minor Child only:

The following income of a minor shall not be clubbed and will be taxable in the hands of the minor himself:

  1. Any income of a minor child suffering from any disability of the nature specified in section 80U like physically disabled, totally blind, etc.
  2. Such income which accrues or arises to the minor child on account of any manual work done by him
  3. Such income which accrues or arises to the minor child on account of any activity involving application of his skills, talent or specialised knowledge and experience.
1. Child in relation to an individual, includes a step child and an adopted child of that individual. [Section 2(15B)]

2. Section 64(1A) does not exclude minor married daughter, even income arising to minor married daughter would be clubbed. However where section 27 applies, clubbing of income from property gifted by the parent does not arise.

3. If both the parents of the minor child are not alive then the income of minor child cannot be clubbed and the guardian of the minor child shall file the return of such income on behalf of the minor. It may be added that it will not be included in the income of guardian, if the guardian is not a parent.

4. Where the minor child attains majority during the previous year, then, the income till the date he remained minor in that previous year shall be clubbed in the hands of the parent.

(3). When Clubbing of Income of Minor Child is not Attracted –

In the cases given below, clubbing provisions of section 64(1A) are not applicable —

  1. Income of minor child (from all sources) suffering from any disability of the nature specified under section 80U is not subject to clubbing provision given above.
  2. Income of minor child on account of any manual work.
  3. Income of minor child on account of any activity involving application of his skill, talent or specialised knowledge and experience.

(4). Exemption under Section 10(32) in case of Clubbing of Income of a Minor Child –

In case the income of an individual includes an income of his or her minor child in terms of section 64(1A), such individual shall be entitled to exemption of Rs. 1,500 in respect of each minor child.

Where, however, the income of any minor so includible is less than Rs. 1,500, the aforesaid exemption shall be restricted to the income so included in the total income of the individual.

9. Income from Self-acquired Property Converted to Joint Family Property [Section 64(2)]

Where an individual, who is a member of the Hindu Undivided Family, —

(a) converts, his separate property as the property of the HUF, or

(b) throws the property into the common stock of the family, or

(c) otherwise transfers his individual property to the family,

otherwise than for adequate consideration, then the income from such property shall continue to be included in the total income of the individual.

In other words, if self-acquired property of an individual is treated/converted into joint family property without adequate consideration, the income derived by the joint family on account of such property shall be included in the total income of the individual who was the owner of such self-acquired property.

For example:

X owns a house property from which he derives an income of ₹. 6,00,000 per annum. If, he converts this property as the property of an HUF of which he is a member. Although the income shall henceforth be received by the HUF but it shall be deemed to be the individual income of X and shall be included in computation of his total income under the head ‘Income from House Property’.

Implication in the case of Subsequent Partition:

Where the converted property has been the subject matter of partition (whether partial or total) amongst the members of the family, the income derived from such, converted property as is received by the spouse, on partition, shall be deemed to arise to the spouse from assets transferred indirectly by the individual to the spouse and the income from the portion, received by the spouse, shall be clubbed in the hands of the transferor.

In the example given above .. ,

if there is partition in the family and there are five members entitled to a share in the HUF property i.e. X, Mrs. X, a minor child of X and two major sons of X assuming they decide to share the property equally then the income from the property shall be treated as follows:

(a) Income from 1/5th share of X ₹.1,20,000;

(b) Income from 1/5th share of Mrs. X ₹.1,20,000 (to be clubbed with the income of X);

(c) Income from 1/5th share of minor child of X ₹.1,20,000 (to be clubbed with the income of X or Mrs. X, whose income is higher, u/s 64(1A). However, X can claim exemption upto ₹.1,500 u/s 10(32);

(d) Income from 2/5th share of other members shall be taxable in the hands of the major sons individually.

Tags

Categories

Archives

Translate:

Translate »