The principle of taxation under the Income Tax Act, 1961 is that every person is liable to pay tax on the income earned by them. However, there are certain circumstances under which another person’s income is included in the assessee’s total income. These provisions, referred to as “Clubbing of Income,” are primarily anti-avoidance measures introduced to prevent tax evasion by transferring income or assets.
The clubbing provisions are encapsulated under Sections 60 to 64 of the Income Tax Act, 1961. These sections outline specific situations where income, though earned by another person, is included in the taxable income of the assessee.
Legal Framework
The statutory provisions governing clubbing of income are found in Chapter V of the Income Tax Act, 1961, under the heading “Income of other persons included in assessee’s total income”.
Relevant Sections:
Section 60 – Transfer of income without transfer of asset
Section 61 – Revocable transfer of assets
Section 62 – Irrevocable transfers not revocable during lifetime
Section 63 – Meaning of revocable transfer
Section 64 – Income of individual to include income of spouse, minor child, son’s wife, etc.
Transfer of Income Without Transfer of Asset (Section 60)
This section applies when a person transfers only the right to receive income, without transferring the ownership of the asset itself.
Key Conditions:
- There is a transfer of income.
- The transfer is without the transfer of the underlying asset.
Example: Mr. A transfers the interest income of ₹50,000 from a fixed deposit to his wife but retains the deposit. The ₹50,000 will be taxed in the hands of Mr. A.
Revocable Transfer of Assets (Section 61)
This section mandates that if a transfer of an asset is revocable, the income arising from such an asset shall be included in the transferor’s income.
Revocable Transfer:
A transfer is said to be revocable if:
- It contains provisions for re-transfer to the transferor.
- The transferor retains the right to reassume power directly or indirectly over the asset or income.
Example: If Mr. X transfers property to Mr. Y but retains the right to take it back anytime, then income from the property is taxed in Mr. X’s hands.
Irrevocable Transfers (Section 62)
Section 62 provides exceptions to Section 61.
Conditions:
- The transfer is irrevocable during the lifetime of the transferee.
- If the transfer is for the benefit of someone else, income is not clubbed with the transferor.
- If the transfer is irrevocable but for a specific period, income during that period is not clubbed.
Definition of Transfer and Revocable Transfer (Section 63)
For Sections 60 to 62 of the Income Tax Act:
Transfer includes any form of settlement, trust, covenant, agreement, or arrangement.
A revocable transfer is one where:
(i) the income or assets can revert to the transferor, or
(ii) the transferor retains control or power over the income or assets, directly or indirectly.
Clubbing of Income: Inclusion of Spouse’s, Minor Child’s and Others’ Income in Individual’s Total Income (Section 64)
Under Section 64 of the Income Tax Act, certain incomes earned by close relatives are required to be included in the total income of an individual. These rules aim to prevent tax avoidance through indirect transfers. Here’s a breakdown:
1. Section 64(1)(ii) – Spouse’s Remuneration
If an individual’s spouse receives income from a concern in which the individual has a substantial interest, and such income is not due to technical or professional qualifications, it shall be clubbed.
Substantial Interest:
In case of a company: holding ≥ 20% of voting shares.
In any other concern: entitlement to ≥ 20% of the profits.
Example: Mr. B has 25% shares in ABC Ltd. His wife is appointed as a manager without any professional qualifications. Her salary will be clubbed in Mr. B’s income.
2. Section 64(1)(iv) – Transfer to Spouse Without Adequate Consideration
If an individual transfers an asset to their spouse without adequate consideration, any income from that asset shall be clubbed with the transferor.
Example: Mr. C gifts a property to his wife. Rent from the property will be included in Mr. C’s income.
3. Section 64(1)(vi) – Transfer to Son’s Wife
This applies when an asset is transferred without adequate consideration to the son’s wife. Income is clubbed in the hands of the transferor.
4. Section 64(1)(vii) – Transfer for Benefit of Spouse
Income arising from assets transferred directly or indirectly for the benefit of spouse will be clubbed.
5. Section 64(1A) – Income of Minor Child
All income of a minor child shall be clubbed with the income of the parent who has a higher total income, excluding the income of the minor.
Exceptions:
- Income of the minor from manual work or skills, talent, or specialised knowledge.
- If the child is suffering from a specified disability under Section 80U.
- Deduction Available: ₹1,500 per minor child under Section 10(32).
6. Section 64(2) – Income from HUF Property Transferred by a Member
If a member of a HUF converts his self-acquired property into joint family property (otherwise than for adequate consideration), income from such property is included in the individual’s total income.
Liability for Tax on Income Included in Another Person’s Return (Section 65)
When income from an asset or firm membership belonging to someone else is included in the assessee’s total income (under Chapter V or Section 27(i)), the legal owner of the asset or the firm’s member can be held liable for the tax on that portion of income. Upon receiving a notice of demand from the Assessing Officer, such person must pay the tax attributable to the income included in the assessee’s return. If the asset is jointly owned, all co-owners are jointly and severally liable for the corresponding tax.
Relevant provisions of Chapter XVII-D (relating to tax recovery) will also apply.
Case Law
K.M. Vijayan & Others v. Union of India & Others (1995)
In K.M. Vijayan & Others v. Union of India & Others ([1995] 215 ITR 371), the Madras High Court upheld the constitutional validity of Section 64(1A) of the Income-tax Act, 1961, introduced by the Finance Act, 1992. The petitioners, including minor assessee and their guardians, challenged the provision because it was arbitrary, discriminatory, violated Articles 14, 19, and 265 of the Constitution, and lacked legislative competence. They argued that minors’ incomes from independent sources (like inheritance, gifts from maternal relatives, or partition) should not be clubbed with their parents’ income, especially when there was no tax avoidance.
The Court, however, ruled that the provision was a valid measure to curb tax evasion and within Parliament’s legislative competence under Entry 82 or the residuary Entry 97 of List I of the Constitution. It held that the law created a valid classification and served a legitimate fiscal purpose. The writ petitions were dismissed, and Section 64(1A) was declared constitutional.
Clubbing Provisions Remain Unchanged in Budget 2025
As per Budget 2025, there have been no significant amendments to Sections 60 to 64 of the Income Tax Act, 1961, which govern the clubbing of income. Neither the Finance Act, 2025 nor the Income Tax Bill, 2025 introduced any changes, reaffirming the government’s intent to continue curbing tax avoidance through indirect transfers and artificial arrangements.
Conclusion
The clubbing provisions under Sections 60 to 64 of the Income Tax Act, 1961 act as a necessary countermeasure to preserve the integrity of India’s tax structure. These provisions deter tax avoidance strategies that involve diverting income to close relatives or associates without transferring ownership or without adequate consideration. As tax planning continues to evolve, so too does the vigilance of tax authorities in interpreting and applying clubbing rules.
Taxpayers must carefully evaluate the implications of transferring income or assets, as seemingly harmless transactions could lead to unintended tax consequences. The key lies in understanding the intent behind the provisions—fairness, transparency, and equity in taxation.
References
[1] Income Tax Act, 1961
[2] K.M. Vijayan & Others v. Union of India & Others [1995] 215 ITR 371
[3] Finance Act 2025
[4] Income Tax Bill 1961
