Clubbing of Income Rules Under Section 64 Explained
- PRITI SIRDESHMUKH
- 4 hours ago
- 11 min read
Clubbing of income under Section 64 of the Income Tax Act, 1961, prevents taxpayers from reducing their tax burden by transferring income-generating assets to close family members. It ensures that the income earned through such transfers—made without adequate consideration—remains taxable in the hands of the transferor. This rule primarily applies to individuals and not to firms, HUFs, or companies, thereby maintaining fairness in taxation and discouraging indirect methods of tax avoidance.
Table of Contents
What Is Clubbing of Income Under Section 64?
Clubbing of income refers to the process of including another person’s income in the taxpayer’s total income for taxation purposes when the income arises from an asset or transfer made without adequate consideration. This provision is intended to prevent individuals from avoiding tax by transferring assets to close relatives like a spouse, minor child, or daughter-in-law. Under Section 64 of the Income Tax Act, 1961, if income is generated from an asset given away without fair compensation, it remains taxable in the hands of the person who originally owned it. This ensures that tax liability falls on the person who truly benefits from the income.
Objective of Clubbing Provisions in Income Tax
The main purpose of introducing clubbing provisions is to curb tax evasion through indirect transfers of income. These rules ensure that individuals cannot shift taxable income to family members in lower tax brackets to reduce overall tax liability. By taxing the income in the hands of the transferor, the law upholds fairness and prevents misuse of exemptions or deductions. It also promotes transparency in reporting and helps maintain the integrity of the income tax system.
Key Rules and Provisions Under Section 64 of the Income Tax Act
Section 64 of the Income Tax Act outlines specific scenarios in which clubbing of income applies. The provisions mainly cover income transferred to a spouse, minor child, son’s wife, or a Hindu Undivided Family (HUF) without adequate consideration. Each subsection defines the nature of the relationship, type of transfer, and the applicable exceptions. These provisions apply only to individuals and not to entities such as firms, HUFs, or companies. Understanding these clauses helps taxpayers identify when clubbing is triggered and ensures proper compliance during income tax filing.
Detailed Explanation of Each Sub-Section of Section 64
Section 64(1)(ii) – If one spouse receives a salary, commission, or fees from a concern where the other spouse has a substantial interest, that income will be clubbed with the income of the spouse who has the higher earnings. The exception applies if the income is due to the spouse’s technical or professional skills.
Section 64(1)(iv) – Any income from assets transferred to a spouse without adequate consideration is clubbed with the income of the transferor. Transfers made before marriage or after divorce are not covered.
Section 64(1)(vi) – If assets are transferred to the son’s wife (daughter-in-law) without fair compensation, the resulting income is clubbed with the transferor’s income.
Section 64(1A) – Income earned by a minor child is added to the income of the parent with the higher earnings. An exemption of ₹1,500 per child per year is available, except for minors suffering from a disability as per Section 80U.
Section 64(2) – When a member transfers personal property to a Hindu Undivided Family without adequate consideration, the related income remains taxable in the hands of the individual transferor.
Clubbing of Income of Spouse
When an individual transfers an income-generating asset, such as shares, property, or money, to their spouse without fair compensation, the resulting income is included in the transferor’s taxable income. Similarly, if a spouse receives a salary or commission from an organization where the other spouse holds a significant interest, the income is clubbed unless the recipient earns it from professional expertise. However, if the transfer occurred before marriage or after legal separation, the rule does not apply. These provisions ensure that spousal transfers are not misused to reduce tax liability.
Clubbing of Income of Minor Child
Any income earned by a minor child (including step or adopted children) is generally added to the income of the parent who earns more. This includes interest, rent, or dividends arising from assets gifted by parents. However, if the income results from the child’s manual work, artistic talent, or any personal skill, it is taxed in the minor’s own name. A standard exemption of ₹1,500 per child per financial year is available for clubbed income. Additionally, if the child is disabled as per Section 80U, their income is not subject to clubbing.
Clubbing of Income Transferred to Son’s Wife (Daughter-in-law)
If an individual transfers any income-producing asset, such as property or cash, to their son’s wife without adequate consideration, the income generated from that asset is clubbed with the transferor’s total income. This provision discourages individuals from transferring assets to their daughter-in-law as an indirect way to reduce taxable income. The income continues to be taxed in the hands of the transferor as long as the transfer remains valid and uncompensated.
Clubbing of Income in Case of HUF (Section 64(2))
When a member of a Hindu Undivided Family (HUF) transfers their personal assets to the HUF without proper consideration, any income arising from such assets is taxed in the hands of the transferor and not the family. The law treats such transfers as indirect attempts to divert income for tax benefits. However, income earned from subsequent investments made by the HUF out of those funds is not clubbed, ensuring fairness in tax assessment.
How Clubbing of Income Works — Practical Examples
Spouse Salary Case: If Mr. A owns 60% of a firm and his wife earns a commission from the same firm, her commission will be added to Mr. A’s income unless she receives it due to her professional skills.
Gift to Spouse Case: Mr. B gifts ₹10 lakh to his wife, who invests it in mutual funds. The dividends or capital gains earned from those investments will be included in Mr. B’s taxable income.
Minor Child Case: Mrs. C’s daughter earns ₹20,000 interest from a fixed deposit made using gifted funds. ₹18,500 (after the ₹1,500 exemption) will be added to Mrs. C’s income.
HUF Case: Mr. D transfers his house property to his HUF. The rent income from that house will be taxed in Mr. D’s hands, not the HUF’s.
Exemptions and Exceptions Under Section 64
Certain transfers are excluded from clubbing provisions. Transfers made before marriage, after divorce, or those made with adequate consideration are exempt. Additionally, income earned by a spouse or minor child through personal effort, professional expertise, or manual labor is not clubbed. For HUFs, income derived from assets that are reinvested by the family is treated separately. These exceptions ensure fairness and recognize genuine transfers that are not intended for tax avoidance.
Section 60 and Section 61 — Related Provisions to Clubbing
Section 60 deals with cases where income is transferred without transferring ownership of the asset. In such situations, income remains taxable in the hands of the original owner. Section 61 covers revocable transfers—where the transferor retains the power to revoke the transfer—ensuring that the tax burden stays with the person who controls the income source. Together, these sections reinforce the intent of the clubbing provisions under Section 64.
Importance of Understanding Clubbing Rules for Tax Planning
Comprehending clubbing provisions helps taxpayers make informed decisions about asset transfers, gifts, and investments within the family. Misunderstanding or ignoring these rules can lead to tax reassessments, penalties, or even prosecution. By identifying situations where clubbing applies, individuals can plan their finances efficiently while remaining compliant with tax laws. Awareness of these rules also aids in proper documentation and transparent reporting during tax filing.
Common Mistakes to Avoid While Applying Clubbing Provisions
Taxpayers often fail to report income arising from assets gifted to relatives or minor children, assuming it is exempt. Another common mistake is overlooking income earned by a spouse from a business in which the other spouse holds a significant interest. Failing to account for such income can result in penalties or notices from the Income Tax Department. Proper understanding and expert consultation ensure that income is reported accurately, preventing compliance issues.
Latest Updates and Notifications on Section 64 (Budget 2025)
The Union Budget 2025 reaffirmed the importance of clubbing provisions to ensure equitable taxation. The Central Board of Direct Taxes (CBDT) has issued notifications simplifying reporting for clubbed income in e-filing utilities. Enhanced disclosure sections now allow taxpayers to specify relationships and income sources under clubbing provisions clearly. With these updates, the filing process has become more transparent and user-friendly, minimizing the chances of reporting errors.
How TaxBuddy Helps Simplify Income Clubbing and Tax Filing
TaxBuddy’s AI-driven filing platform helps taxpayers identify income that falls under clubbing provisions automatically. The system ensures that such income is correctly reported during ITR filing, preventing errors and avoiding future scrutiny. With both self-filing and expert-assisted options, users can choose their preferred mode of filing while ensuring full compliance with Section 64. TaxBuddy also provides post-filing assistance for clarifications or notices related to clubbed income.
Conclusion
Clubbing of income provisions ensures fair taxation by preventing the misuse of family relationships for tax evasion. Understanding these rules allows taxpayers to remain compliant while optimizing their financial planning. For anyone looking for assistance in tax filing, it is recommended to download the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.
FAQs
Q1. Does TaxBuddy offer both self-filing and expert-assisted plans for ITR filing, or only expert-assisted options?
Yes, TaxBuddy offers both self-filing and expert-assisted plans to suit the needs of different taxpayers. The self-filing plan allows individuals to file their income tax returns independently using TaxBuddy’s AI-driven interface, which automatically detects errors and suggests corrections. On the other hand, the expert-assisted plan connects users with certified tax professionals who review, prepare, and file the return on their behalf. This dual offering ensures flexibility, accuracy, and peace of mind for both new and experienced taxpayers.
Q2. Which is the best site to file ITR?
The official Income Tax Department portal is the government’s platform for filing returns. However, for a smoother, faster, and more guided experience, TaxBuddy is among the most preferred private platforms in India. It combines AI automation with expert support, ensuring that deductions, exemptions, and clubbing provisions are applied correctly. Its mobile-first design, secure data handling, and responsive customer support make it a trusted choice for individuals, professionals, and small businesses.
Q3. Where to file an income tax return?
An income tax return can be filed either directly through the official government portal (www.incometax.gov.in) or via trusted e-filing platforms like TaxBuddy. The advantage of filing through TaxBuddy lies in its guided interface, which helps users avoid common mistakes related to deductions, clubbing of income, or incorrect data entry. Moreover, it provides personalized filing options and post-filing support, which are not available on the government website.
Q4. Does clubbing of income apply to all taxpayers?
No, the clubbing provisions under Section 64 of the Income Tax Act apply only to individual taxpayers. They do not apply to entities such as Hindu Undivided Families (HUFs), partnership firms, companies, or associations of persons. These provisions specifically address income transferred between certain family members to prevent tax evasion. Understanding who these rules apply to helps taxpayers avoid unnecessary inclusion or omission of income during filing.
Q5. What is meant by “adequate consideration”?
Adequate consideration refers to a fair and reasonable value received in exchange for transferring an asset or income-generating property. For instance, if an individual sells a property to their spouse at market value, the transaction has adequate consideration and is not subject to clubbing. However, if the same property is gifted or transferred without receiving fair compensation, the income from that asset will be taxed in the hands of the transferor. This principle ensures that genuine business or personal transactions are not penalized, while preventing misuse of gifts to reduce tax liability.
Q6. Is a spouse’s professional income also clubbed?
No, income earned by a spouse through their own technical, professional, or artistic skills is not subject to clubbing under Section 64. For example, if one spouse is a doctor, lawyer, or software engineer earning income from their profession, that income will be taxed in their own name. The clubbing provisions apply only when the income is derived from an asset transferred by the other spouse without adequate consideration or from employment in a concern where the other spouse holds a substantial interest.
Q7. Is income from a minor child’s talent taxable under clubbing?
No, income earned by a minor child through personal skill, manual labor, or artistic talent is not clubbed with the parent’s income. Such income is treated as the minor’s own and taxed separately. For example, if a minor earns money by performing in television shows or creating digital content, this income will be taxed in their name. The intent of the law is to exclude income arising from the child’s personal efforts from clubbing provisions, focusing only on passive income such as interest or rent from assets transferred by parents.
Q8. Can gifts between spouses cause clubbing of income?
Yes, gifts between spouses can trigger clubbing provisions if the gifted asset generates income. For example, if a husband gifts a sum of money to his wife, and she invests it in fixed deposits or mutual funds, the interest or dividend earned will be added to the husband’s taxable income. However, future income earned from reinvesting that income (called “secondary income”) is not clubbed. To avoid such complications, taxpayers should keep proper documentation of gifts and ensure that any income arising from them is reported accurately.
Q9. Is income of a disabled minor child clubbed?
No, income earned by a disabled minor child is exempt from clubbing provisions under Section 64(1A). Such income is assessed in the name of the child under Section 80U, which recognizes disabilities including blindness, autism, and cerebral palsy. The exemption ensures that parents are not burdened with additional tax liability for income earned or received in the name of their disabled child. This provision upholds fairness and supports financial independence for differently-abled minors.
Q10. Does Section 64 apply to pre-marriage transfers?
No, transfers made before marriage are not covered under Section 64. For instance, if an individual gifts property or money to a fiancée before the marriage, any income arising from that asset will not be clubbed after marriage. The law applies only to transfers made when the relationship between the transferor and the transferee exists. Similarly, transfers made after divorce are also excluded. This ensures that only genuine transfers within a legally recognized relationship are subject to clubbing.
Q11. What exemption is available for clubbed income of a minor child?
When a minor child’s passive income (such as interest or rent) is clubbed with a parent’s income, the parent can claim an exemption of ₹1,500 per child per financial year under Section 64(1A). This exemption is allowed for each minor child separately, offering partial relief from the additional tax burden. For example, if a parent has two minor children whose interest income is clubbed, they can claim a total exemption of ₹3,000 per year. Though modest, this relief acknowledges the inclusion of a child’s income in the parent’s return.
Q12. How can TaxBuddy help ensure proper reporting of clubbed income?
TaxBuddy simplifies the complex task of reporting clubbed income through its intelligent tax-filing system. The platform automatically detects potential clubbing situations—such as gifts to spouses, investments made in a minor’s name, or transfers to a daughter-in-law—and adjusts the filing accordingly. It also provides expert-assisted filing options, where tax professionals review each case to ensure accuracy. By combining automation with expert insight, TaxBuddy helps taxpayers stay compliant, avoid mistakes, and file error-free returns in minutes.
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