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Introduction:

India has progressive taxation policy that makes higher the tax liability at the stage of higher income tax slabs the higher the income is. To bypass the increased tax burden, some taxpayers go as far as transferring their assets and income into their spouses’ name. On the other hand, the Income Tax Department has created provisions for “clubbing of income” under Section 64 of the Income Tax Act which seeks to forestall these avoidance strategies.

Clubbing of Income under Section 64 :

As the term implies, ” clubbing of income” involves adding or combining the income of another person, usually family members, with one’s own income This arrangement is permissible under the Income Tax Act Under Section 64 However, specific restrictions are imposed on specific individuals and situations to prevent such actions.

Put simply, “clubbing of income” refers to the process wherein the earnings of a designated individual, instead of being evaluated independently, are aggregated with the income of another specified individual, typically with a higher income level, for taxation purposes. Consequently, this amalgamation often elevates the combined income into a higher tax bracket, resulting in an increased tax liability.

Applicability of Clubbing of Income:

• Section 64 specifies individuals whose income may be clubbed in various circumstances. These people include:
• Income of the minor child, excluding income from scholarships and stipends,, is included for parents whose total income (excluding the child’s income) exceeds their income
• Income acquired by a spouse from a firm or entity wherein the other spouse possesses a significant stake (such as 20% or more of the voting power in a company) can be aggregated with the income of the spouse having the higher earnings.
• Income stemming from assets transferred by an individual to another person without sufficient consideration (for instance, gifting an apartment to a son) can be amalgamated with the transferor’s income.
• Income from a trust established by an individual for the benefit of specific persons (such as a spouse, children, etc.) or income from a partnership in which the individual holds control may be combined with the individual’s income

Exceptions:

• While clubbing provisions are designed to prevent income splitting and tax avoidance, certain exemptions and reliefs provide some flexibility. These exclusions and reliefs include:
• Investment exemptions: Income earned by a minor from an investment fund financed by actual gifts from non-parent relatives remains exempt.
• Specified Property Exclusion: Income from property a spouse receives through inheritance from parents or specific gifts remains exempt.
• Minimum income: Income earned by a minor below a certain limit (currently Rs 1,500 per annum) will remain exempt from clubbing

Consequences of Clubbing:

The implications of income clubbing can be substantial for both transferor and transferee. For the transferee, it increases taxable income, possibly pushing them into a higher tax bracket and increasing their tax liability Conversely, the transferor the the may lose certain tax benefits or exemptions applicable to specific categories of funds.

Strategies:

In order to reduce the impact of clubbing of income, taxpayers can use specific strategies, e.g.

• Transferring assets with adequate consideration, such as fair market value, can serve to circumvent income clubbing.
• Investing in assets that qualify for the exemption, such as gifts to parents or specific investments for minor children, can help avoid clubbing
• Taxpayers can explore ways to legally split income among family members to optimize tax liability, such as splitting wages between spouses.

Specified scenarios of clubbing income:

Section 60: 

Any individual who transfers income without transferring the asset, either through an agreement or by any other means, will have any income from such an asset clubbed in the hands of the transferor.

Section 61:

Any transfer of property subject to the condition that any income derived from such transfer may be recovered shall constitute a club in the hands of the transferor

Section 64(1A):

Section 64(1A) Minor Any income derived from or continuing to accrue from your minor child where the child includes both a stepchild and an adopted child. The group’s policies also apply to a daughter married to a minor. The funding will be in the hands of the wealthiest parent in the group.

Section 64(1)(ii):

If your spouse receives any compensation irrespective of his or her name as salary, commission, fee, or otherwise and in any form ie. income or property from any concern in which you have a substantial interest* in which the income group will go into the hands of the taxpayer’s spouse Income is sufficient (before clubbing).

Exceptions to clubbing: Clubbing is not attractive if a partner has technical and administrative requirements for any income of the partner, and such income is solely attributable to his or her technical and professional skills and experience

Section 64(1)(vi):

The transfer of assets, either directly or indirectly to your daughter-in-law by you with no compensation appropriate to them is similar to the income stream from those assets being assigned to the transferor.

Section 64(2):

Hindu Undivided Family (HUF) If a member of HUF transfers his personal property to HUF due to inadequate consideration or converts such property into HUF property, the income from the converted property is to be credited in the hands of the person

Things To Remember:

• The clubbing scheme involves both income and loss.
• Any capital gain realized from the subsequent transfer of the asset by the transferee will be deemed as income and shall be clubbed with the income of the transferor.
• If only partial payment is due or payable, only an insufficient portion of the deposit shall be credited to the transferee.
• The clubbing provisions will not be applicable to the income derived from the clubbed income.

Conclusion:

The clubbing of income  provisions under section 64 are an essential tool in the struggle against income tax injustice in addition to being crucial in the fight against tax evasion. It is absolutely important for both taxpayers and tax advisors to understand the jurisdiction and boundaries of this predicament. The pertinence of its steady implementation enables the Indian income tax system to move one step further towards a fairer and a more efficient system.