Clubbing Of Income Under Section 64
Introduction:
When it comes to taxation, the Indian Income Tax Act, 1961, is replete with provisions aimed at preventing tax evasion and ensuring fair taxation. One such provision is the concept of “clubbing of income.” This provision prevents taxpayers from transferring their income to others, typically family members, to lower their overall tax liability. In this blog post, we’ll delve into the nuances of clubbing of income, its implications, and how it affects taxpayers.
What is Clubbing of Income?
Clubbing of income refers to the practice of treating the income of one person as the income of another person for the purposes of taxation. This is usually done in cases where the income is earned by one person but is intended to benefit or be used by another person.
Here are some income tax provisions when income can be clubbed:
Section 60
Section 60 states that if a person transfers income to another person without transferring the underlying asset, the income will be taxable in the hands of the transferor. This applies when the transfer is made through an agreement or in any other way. In such cases, any income generated from the asset will be clubbed in the hands of the transferor, even if the income is received by the transferee.
X receives Rs 20,000 monthly rental income from his Delhi home. To avoid taxes, he has the tenant deposit the money into his wife’s account. However, since the house’s ownership remains unchanged, X is still liable for taxes on the income. This common mistake underscores the importance of transferring legal ownership of assets to avoid tax liabilities. Proper tax preparation requires attention to such details to prevent errors and ensure compliance.
Section 61
A clause allowing the transferor to reclaim ownership of the item at any moment after it has been transferred to the recipient is kept in the transaction. It is known as a Revocable Transfer in this scenario. Any income from an asset that is transferred in a “revocable manner” is subject to taxation in the transferor’s hands under the terms of the Clubbing of Income.
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.
Section 64(1)(ii), 64(1)(iv), 64(1)(vii): Clubbing of Income of Spouse
The simplest method of avoiding taxes is, as the saying goes, to shift income into your spouse’s name. To control such transactions, there are extremely specific provisions in place. Below is a discussion of each of the several scenarios.
Section 64(1A)
Section 64(1A) deals with the clubbing of income of minor children. Any income earned by a minor child, including step or adopted children, is clubbed in the hands of the higher- earning parent for tax purposes. This provision also applies to minor married daughters.
However, if the parents are divorced or separated and the child is maintained by one of the parents, then the income will be clubbed in the hands of that parent for tax purposes.There are some exceptions to the clubbing of income of minor children, including income earned by a disabled child, income earned by a major child, and income earned from manual work or specialized knowledge and experience.
Section 64(1)(ii)
Section 64(1)(4) deals with the clubbing of income from a concern in which the taxpayer has substantial interest, if the taxpayer’s spouse receives any remuneration from that concern, irrespective of its nomenclature or mode of payment
In such cases, the income received by the spouse will be clubbed in the hands of the taxpayer or spouse, depending on whose income is greater before clubbing. However, if the spouse possesses technical or professional qualifications and the income is solely attributable to the application of their technical or professional knowledge and experience clubbing of income will not be attracted.
Substantial Interest:
For Company: If the individual along with his relatives (Spouse, brother, sister or any lineal ascendant or descendant of the individual) holds not less than 20% equity shares beneficially.
For others: If an individual along with his relatives is entitled to atleast 20% of profits
Section 64(1)(iv)
Section 64(1)(iv) deals with the clubbing of income arising from assets transferred by a taxpayer to their spouse for inadequate consideration, either directly or indirectly.In such cases, any income arising from the transferred asset is clubbed in the hands of the transferor for tax purposes, except in cases where the asset is a house property.
However, there are some exceptions to this clubbing provision, such as if the asset is received as part of a divorce settlement if the assets are transferred before marriage if no husband and wife relationship subsists at the time of income accrual, or if the asset is acquired by the spouse out of pin money.
Section 64(1)(vi)
Section 64(1)(vi) Act deals with the clubbing of income arising from assets transferred by a taxpayer to their daughter-in-law for inadequate consideration, either directly or indirectly. In such cases, any income arising from the transferred asset is clubbed in the hands of the transferor for tax purposes.
Section 64(1)(vii)
Section 64(1)(vii) deals with the clubbing of income arising from assets transferred by a taxpayer to any person or association of persons for inadequate consideration to benefit their daughter-in-law, either immediately or on a deferred basis
In such cases, any income arising from the transferred asset is considered as the transferor’s income and clubbed in their hands for tax purposes
The provision is designed to prevent taxpayers’ froes transferring assets to any person or association of persons for inadequate consideration to benefit their daughter-in-law and avoid tax liability.
Section 64(1)(viii)
Section 64(1)(vii) applies when any person or association of persons transfers any assets directly or indirectly for inadequate consideration to any person or association of persons to benefit their spouse either immediately or on a deferred basis, in such cases, any income from such assets will be considered the income of the transferor and will be clubbed in their hands.
Section 64(2)
Section 64(2) dealt with the clubbing of income in the case of Hindu Undivided Families (HUF), It states that if a member of the HUF transfers his individual property to the HUF for inadequate consideration or converts such property into HUF property, then any income from such converted property shall be clubbed in the hands of the individual. This means that the income from house property will be taxed as the income of the individual and not the HUF. For instance, you have a residence that generates Rs 5,00,000 in rental income annually. The entire Rs 5,00,000 in income will be subject to taxation in your name alone if you transfer this house to the HUF without giving it proper or sufficient thought.
In which Cases Clubbing of Income is not applicable?
Income transferred before marriage:
Any asset or gift given to the would-be wife before the wedding will not be considered under the clubbing provisions. Since the relationship of husband and wife should exist both at the time of transfer of assets and at the time of accrual of income.
Income derived from clubbed income:
Except in the case of a minor, when the asset is transferred to a spouse or daughter-in-law (son’s wife), any further income derived from the income generated shall not be clubbed. For e.g., Mr. X transferred an amount of Rs 5,00,000 to his wife. This amount is invested in a 10% FD; thus, the interest of Rs. 50,000/- will be taxable in the 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 the wife only.
Saved money is not considered 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?
Till now, we shared how the income tax department can nab your income using clubbing of income provisions. But like it’s said, “where there’s a will, there’s a way.” Now, we’ll share some super-cool tips using which you can magnify your income tax savings.
Gift money to your wife or daughter-in-law before marriage:If your wife/ daughter-in-law is not working and has no income then you can save income up to Rs 2,50,000. However, 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 an exemption of house rent allowance. Also, if your parents do not earn any other income, they can claim further benefits. They will fall within the basic exemption limit and will have to pay less income tax.
Health insurance of family members:
You can further claim a deduction u/s 80D by getting health insurance for your family. The maximum deduction that can be claimed is Rs 25,000 for an individual and his/her spouse and children. When you pay a premium for your parents, who are senior citizens, then the maximum deduction will be Rs 50,000. Further, the deduction can be claimed for medical expenditures incurred by senior citizen parents. It is within the limit of Rs 50,000
Prefer Loan over gift:
You can give your spouse a 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 modes like banking channels. This will shift the tax liability in your spouse’s hands, and no clubbing would be done. However, it must be analyzed 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 the 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 gifts to relatives, which is again tax-free.
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 in the name of your wife; rental income from such house, say Rs 50,000, will be clubbed, but if the house is in the name of your wife, then the further income generated by investing this rental income of Rs 50,0000 will not be taxable in your hands.
Investing in products like PPF:
By investing in products like PPF (which is an EEE product) in your spouse’s or minor child’s name, then as the maturity proceeds of PPF are tax-free, you will enjoy tax-free income. The same applies to equity products.Also, the amount can be gifted to senior citizen parents, major children, or earning spouses with lower tax liability who can further invest this amount in PPF to earn more tax-free returns.
Disclosure in ITR Form
Any individual having income as per provision of Section 60 to 64 due to clubbing provision then specific disclosure needs to be provided. It is important to note that Individual taxpayers will have to use ITR -2 /3 if they have any income to be considered under clubbing provision.
Such income which is accrued in the name of Spouse , Child or other individual which is subject to clubbing provision needs to be declared in Total Income (In respective head of income) and separate disclosure is required in Schedule SPI in the below ITR Format
Let us explain through an example:
Mr. Happy has only a salary income of Rs 6,00,000. He has a minor son, Master Super Happy. Now Super Happy is a happy-go-lucky chap. He likes to play lottery games with his papa, Mr. Happy. One fine day, Super Happy became super lucky and won Rs 2,00,000. Since Super Happy is a minor, therefore, his income will be clubbed with Mr. Happy’s income. Now Mr. Happy has to file his return in form ITR 2. If there had been no “lottery income” for his minor son, then he’d have used the ITR 1 Form.
The basic point is that, depending upon the nature of income to be clubbed ITR Form will vary. So next time, please keep in mind before choosing your ITR Form if you have any clubbed income.
Conclusion
The clubbing of income provisions plays a crucial role in preventing tax evasion and maintaining fairness in the tax system. By including certain incomes in the tax assessment of individuals who have transferred assets or income to family members or other entities, these provisions help ensure that taxpayers pay their fair share of taxes. Understanding the implications of clubbing of income is essential for taxpayers to navigate the complexities of the tax system and remain compliant with tax laws.