The Provisions relating to Clubbing of Income

Generally a person has to pay tax for his own income. But there are cases where a person is taxed for income belonging to somebody else.

People try to reduce their tax liability by transferring their assets to other family members or by arranging their income in some way that tax liability falls on others, but the benefits of income comes to them. Thus to counteract such tax avoidance, provisions have been incorporated in the Income Tax Act to include such other income within the income of the assessee.

What is “clubbing of income”?

The inclusion of some other incomes in the income of the assessee is known as “Clubbing of Income”.

Sections dealing with clubbing of income:

According to sections 60 to 64 of the Income Tax Act, a person is liable to pay tax for his own income as well as for an income belonging to somebody else if some conditions are fulfilled.

Applicability of clubbing of income:

Clubbing provisions are applicable only to individuals and not to other kinds of assessee such as HUF, firm, company etc.

When clubbing of income is done?

In the following circumstances, the income of someone else is included in the income of an assessee.

1. ‘Revocable transfer’ (Section 61) – It denotes a transfer which may be reversed during the lifetime of the transferee. It means a transferor of an asset with a right to re-acquire it at any time in future. It also includes a transfer with the right to get the benefit of the income from it during the lifetime of transferee. The income from such asset is taxable in the hands of the transferor but not in the hands of the transferee.
2. Income of spouse (Section 64) – The following incomes of the spouse of an assessee is included in his  income: a.Any remuneration received by the spouse from a concern where the assessee has substantial interest.b.Where any asset is transferred by an assessee to his spouse directly or indirectly, except for consideration or to live apart, any income from such asset.
3. Income of a minor under Section 64 (1A) – All income arising or accruing to a minor child is clubbed in the income of his parent whose total income excluding the income of the minor is greater. But if the parents are separated, the income of minor will be included in the income of the parent who is liable to maintain the minor in the relevant previous financial year.Exemptions provided in the rule: An assessee is given exemption of Rs. 1,500/- per year for every minor child if the income of such minor exceeds that amount. But if the income of any minor is less than Rs. 1,500/- per year, the said exemption shall be restricted to the income included in the total income of the assessee.