Clubbing of Income: All You Need to Know

In our country, there are several situations where the income of one person is combined with another under the Income Tax Laws. Clubbing of income simply means adding or including another person’s (usually family members’) income to one’s own.

WHAT DO YOU MEAN BY CLUBBING OF INCOME?

Section 64 of the Income Tax Act of 1961, deals with the clubbing of income. Clubbing of income indicates that the income of another person is included in the assessee’s total income.

It is pertinent to note that a person cannot divert his income to another person while claiming that it is not his, and if he does so, the money proved to be produced by any other person is added to the assessee’s total income, and the assessee must pay tax on it.

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It is typically done with close family members or relatives. However, it is achievable for anyone if the guidelines are followed.

The Income Tax Act does not simply allow for the addition and display of any individual’s income. It must adhere to the rules and be relevant.

RELEVANT PROVISIONS UNDER INCOME TAX ACT 1961.

While Section 64 of the Income Tax Act of 1961 mainly contains provisions relating to the clubbing of income, there are other provisions too, and they are as follows :

• Section 60 deals with transferring income without transferring assets, whether through an agreement or other means. And it includes any income or revenue from such assets that  will be clubbed in the hands of the transferor
•  Section 61 deals with the scenario in which transferring asset occurs on the condition that it can be revoked.
• Section 64(1)(iv) states that if an individual transfers an asset (other than a residence) to their Clubbing of minor’s incomee without reasonable consideration, the income from that asset is included in the transferor’s income.  Income from the transfer of house property without adequate consideration will also attract clubbing provisions, but in such a circumstance, it will not be done under Section 64(1)(iv) of the Act and it will be done according to Section 27​ of the Income Tax Statute. Section 64(1)(iv)’s clubbing rules do not apply in all cases.
• Section 64(1A) deals with any income originating or accruing to a person’s minor child and includes own, stepchild, or adopted child. Under this provision, the income will be consolidated in the hands of the higher-earning parent.

What are the things to note in the case of Clubbing income?

•  The clubbing clause applies to both income and losses.
• The capital gain on the future transfer of the asset by the transferee will be regarded as income and will be combined with the transferor’s income.
• The revenue generated by the transformed form of the asset shall be combined in the hands of the transferor.
• The clubbing provisions will also apply to indirect and cross-transfers.
• If a person has income subject to the clubbing provision, they must file ITR-2 / 3 and fill out Schedule SPI reporting such clubbed income.
  

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Thus, clubbing of income refers to the situation where the income of various persons is combined or clubbed together. It is frequently done for tax considerations in order to simplify the process or obtain any benefits. Income clubbing is achieved by unique tax rules and processes that differ by country. 

By clubbing of income, tax authorities attempt to safeguard the integrity of the tax system and ensure that individuals pay taxes on the income they actually make.

These laws apply to a variety of scenarios, including income transfers to spouses, income generated by minor children, revenue from gifts, and other related financial transactions.

Penalties and repercussions may also occur if people adopt to clubbing of income in order to evade their taxes.

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