Provisions of Clubbing of Income under Income Tax Act

  • Blog|Income Tax|
  • 3 Min Read
  • By Taxmann
  • |
  • Last Updated on 17 July, 2023
In an attempt to save taxes, taxpayers are always in search of tricks and tactics. One such endeavor is the transfer of assets to close relatives or the splitting of income into different names under the pretext that it is not taxable. Transferring house property to family members or making investments in the name of spouse or children or paying salary to the spouse from an entity where the husband is the owner, etc. are some of the most common ways employed to reduce the tax burden. However, due to the obliviousness of provisions relating to “clubbing of income” enshrined in the Income-tax Act, 1961, these attempts to save tax by the common man fails.
Before entering into certain transactions with your spouse or children, you should know the tax consequences which are enumerated below:

1. Transfer of Income

If a person transfers income from any asset to spouse, children or any other person under a settlement, trust or agreement without transferring the asset then such income shall be included in the total income of the transferor. This rule is applicable even if such agreement to transfer the income was entered into before commencement of the Income-tax Act (i.e., April 1, 1962).  

Income Tax Act 1961

2. Transfer of assets for inadequate consideration:

When a person transfers his asset in the name of his spouse, directly or indirectly, for an inadequate consideration, the clubbing provision shall apply. In that situation, the income arising from such asset is clubbed in the income of the transferor. Example, if husbands invests Rs. 2 lakhs in Fixed Deposits in the name of his wife, the interest earned from such FD shall be clubbed with the income of husband. In case of transfer of house property by the owner to his or her spouse for inadequate consideration, the transferor is considered to be the deemed owner. Consequently, the income arising from such house property is taxed in the hands of transferor.  When any asset is transferred to spouse for an adequate or full consideration, the provisions of clubbing of income do not apply. Therefore, the income from the asset transferred is considered to be the income of the transferee and thus taxed accordingly. 

Dive Deeper:
[FAQs] Income Tax Returns (ITR) | Clubbing of Income

3. Remuneration from a concern in which spouse has substantial interest:

When a person receives remuneration by way salary, commission, fees or in any other form in cash or kind from a concern in which his or her spouse has substantial interest, then such income is clubbed in the income of spouse. Such clubbing provision applies if income is received without any technical or professional qualification. If person is suitably fit for the job and is technically and professionally qualified, income shall not be clubbed with the income of spouse.  Apart from the above mentioned provisions, there are other provisions as well that may apply in case of transfer of assets to family members.

Read all other provisions at Taxmann’s Income Tax Module. To research in relevant case laws, clarification issued by the CBDT and to read the opinion of tax experts on controversial issues relating to clubbing, subscribe to the Taxmann’s subscription. Taxmann’s Income Tax subscription covers more than 80,000 case laws pronounced by the Supreme Court, High Courts, Income-tax Appellate Tribunal, 7600+ articles on direct taxation by experts in the field, up to date Income-tax Act, Income-tax Rules, Notifications and circulars. For all the direct tax related material, subscribe to Taxmann’s Income Tax Module.       

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