Clubbing of income under Section 64 of Income Tax Act in India prevents tax evasion by attributing income earned by certain family members or entities to the taxpayer. Understanding these rules is crucial for compliance. What does Section 64 entail, and how does it impact you? Let’s break it down.
What Is Clubbing of Income?
Clubbing of income under Section 64 of the Income Tax Act, 1961, refers to the inclusion of certain incomes in the hands of the transferor, even though the income is actually received by another person, such as a spouse, minor child, or daughter-in-law. This provision aims to prevent tax evasion through the indirect transfer of income-generating assets. Key provisions include:
- Spouse: Income from assets gifted to a spouse, like rental income from a gifted property, is clubbed with the transferor’s income, unless the spouse uses professional skills (e.g., a doctor spouse’s clinic earnings).
- Minor Child: Income from investments in a minor’s name (below 18) is clubbed with the higher-earning parent, except for income from the child’s skill or manual work.
- Daughter-in-law: Income from assets transferred to a son’s wife without adequate consideration is also clubbed with the income of the transferor. This provision applies to transfers made after 1st June 1973.
- Benefit of Spouse: If an asset is transferred to a third party for the benefit of the spouse, the income arising from that asset is also clubbed with the transferor’s income. This includes both immediate and deferred benefits
Implications: Tax Liability and Planning:
Clubbing of income under Section 64 of Income Tax Act in India increases the transferor’s tax burden. For example, if you gift ₹10 lakh to your spouse, who earns ₹50,000 interest, that interest is taxed, potentially at 30% slab rate, saving no tax. However, exemptions exist: ₹1,500 per minor child is deductible under Section 10(32).
Strategic planning, like gifting to a major child or investing in tax-free bonds, avoids clubbing. In 2024, 1.4 crore taxpayers faced scrutiny for gifting misuse, per IBEF. In addition, clubbing applies to income, not capital gains.
Key Rules and Exceptions:
To navigate clubbing of income under Section 64 of Income Tax Act in India:
- Clubbing applies only to direct transfers without consideration, not loans or inherited assets.
- Income from reinvested clubbed income (e.g., interest on interest) is not clubbed, per Income Tax Act.
- Clubbing ceases if the relationship ends (e.g., divorce) or the minor turns 18.
- Tax is computed before clubbing, ensuring fairness, per CBDT.
Non-compliance attracts penalties up to 100% of tax evaded, per Section 271(1)(c). In 2024, HUF-related clubbing disputes rose 20%, per the Economic Times, due to complex asset transfers.
Reporting Clubbed Income in Income Tax Returns:
Taxpayers with income subject to clubbing provisions must disclose this in their Income Tax Returns (ITR). This includes reporting the income under the relevant head (e.g., salary, income from other sources) and providing detailed information in the Schedule SPI (Specified Person Income) section of the ITR form.
Conclusion:
Clubbing of income under Section 64 of Income Tax Act in India ensures fair taxation but requires careful planning to avoid pitfalls. Understanding the provisions of Section 64 is crucial for effective tax planning. By being aware of these rules, you can make informed decisions and optimize their tax liabilities. Ready to comply? Explore more tax insights now!
– Ketaki Dandekar (Team Arthology)
Read more about Clubbing of Income under Section 64 here – https://cleartax.in/clubbing-income