Clubbing of Income Under Section 64 of the Income Tax Act

The Indian tax system follows the rule of progressive taxation. According to this system, you have to pay more taxes as your income increases depending on the slab that you belong to. To save taxes, you can transfer your assets and income to your wife, children, parents or any other relative's account. This will decrease your income and save tax.To deal with this situation, the income tax department has introduced clubbing of income'. This is defined under Sections 60 to 64 of the Income Tax Act. Read this blog to learn what Section 64 of the Income Tax Act specifies.

• Clubbing of income in the Income Tax Act means adding another individual's income to your own and paying tax on the total.
• You can club the income of your spouse, minor children, daughter-in-law and other relatives.
• Clubbing is available for Hindu Undivided Families (HUFs).
• There are instances wherein clubbing of income is not allowed.

The term clubbing of income means including or adding the income of another person to your income and then paying taxes on the total. The income added to your income is known as deemed income. Clubbing of income applies to the individual taxpayers only; other assesses like firms, Hindu Undivided Families (HUFs) or companies are excluded under Section 64 of the Income Tax Act.

Section 64 of the Income Tax Act is subdivided into various subsections to deal with the clubbing of income with different types of taxpayers .Here's an analysis of these subsections in detail:

Clubbing of Income With Spouse - Section 64(1)(ii), 64(1)(iv), 64(1)(vii)

You can transfer some of your income to your spouse to reduce your tax liability. However, there are specific rules for clubbing your income with your spouse.Here's what they are:

• For the job in which your spouse is employed according to his/ her technical or professional qualifications, the income earned by your spouse is taxable in his/ her account only. For example, you are the shareholder of a company with a 45% stake and your spouse is in the managerial position due to his/her capabilities and is earning a remuneration of ₹25,000 per month. In this situation, the income will be taxed in your spouse's account not your account.In the situation where there is no technical or professional qualification of the spouse, the income earned by the spouse from the entity is clubbed under the section and then you are liable to pay the taxes on the clubbed amount.

• The asset is transferred under adequate consideration
• Divorce
• The transfer of assets was before marriage.

• Your spouse is part of a certain entity in which you have a considerable interest - In this case, two sorts of situations arise according to which the rule of clubbing of income is applied. These situations are as follows:
• When you and your spouse are part of the same entity and have a considerable interest in the entity then the remuneration earned from the entity is clubbed and tax is charged on the hand of the person who has the higher value of the remuneration. However, if both spouses are part of the entity according to their professional or technical qualifications, clubbing of the income is not applied and they are taxed individually according to their income.
• One of the most common ways to save taxes is by transferring income-earning assets in the spouse’s name without adequate consideration. In this situation, the income earned from the asset is clubbed and is taxed on the transferor. This provision excludes certain situations like:
• The nature of the asset is changed by the transferee - For instance, the gift was initially not earning any income but after the transfer, it starts yielding income. Then the income generated is taxable under the clubbing of the income.
• Transfer of the asset made to the third party- In this situation, the income generated will fall under the category of the clubbing of the income as the transfer was made to avoid taxation.

Clubbing of Income of Daughter-In-Law - Section 64(1)(vi),64(1)(viii)

Under this section any transfer of income made to your daughter-in-law’s account, to avoid taxation, will be taxed in your account only.

Clubbing of Income of Children Below 18 years - Section 64(1A)

Under this section, any sort of income earned by a minor is taxable in the hands of the parent, whose income is higher. There are certain situations where this clubbing of income does not apply. These are as follows:

• The child is suffering from any disability under section 80 U.
• The income is earned through manual work by the child himself/ herself.
• The income is earned by the child through his/ her talent.

Under the taxation law, an exemption of ₹1500 is provided to every minor child’s parents whose income is clubbed.In the case of the major child, no clubbing of income is applicable. However, if, during a financial year, the minor child has attained majority, then income is taxed under the Clubbing Act till the age of the minority.Clubbing of Income for HUFs - Section 64(2)
An HUF is considered as a separate entity and you have to pay taxes accordingly. But if a transfer of income from personal assets is done in an HUF account to avoid taxation without any consideration, then the tax is to be paid by the transferor. Also Read: Section 80GGC Of The IT Act: 3 Things You Should Know

There are different situations where clubbing of income is not applicable. These situations are as follows -:

• Income transferred before marriage
• Income earned from the clubbed income
• Savings by the wife from the household expenses will not be considered a transfer of income

Here are some instances wherein you can avoid clubbing of income -

• Gifting money to your non-earning wife and daughter-in-law before marriage, in this case, you can save up to ₹2.5 lakhs
• By paying rent to your parents.
• Buying health insurance for the family members. Under section 80 D of the Taxation Act , you can claim a deduction
• Give a loan at a lower rate of interest instead of a gift. The only catch in this situation is that it should be properly documented and traceable
• Investments through a joint account
• Investment for the non-working spouse
• Investing in products like PPF for your spouse or child

Also Read: Section 90, 90A, and 91 of the Income Tax Act

The clubbing of the income taxation process is the same as regular taxation. The only thing that differs is the amount and the tax is to be paid by the primary holder only. For example, if a minor son wins a lottery, then the amount from the lottery is clubbed and is mentioned in the ITR form of the parent as a prize from the lottery. In this case, the parent will be liable to pay taxes on the amount. Also Read: ITR 5 Form – Meaning, How To File It & Who Should File It

Clubbing of income is defined under the provisions of the Income Tax Act and helps you plan your taxes effectively. Know the clubbing of income meaning and understand its rules so you can club the income of your spouse, children or other family members and file correct returns.