What is Clubbing – Section 64 of IT Act

Clubbing for tax purposeIn India persons having huge taxable income are sifting a portion it to persons who have lower taxable income. This practice in India achieved either by transferring profit generating assets or by sifting the revenue generating capacity to certain family members.

To tackle this type of issues, IT department has provisions from section 60 to 65 to make it taxable in the right hand. Due to these provisions Profits generated by one person gets added to hand of some other person and taxed in the hand of such other person’s.

If a person does not pay tax by applying clubbing provisions and the assessing officer found out such things then the tax amount that has not been paid will be recovered from the hands of the person who is actually carrying the asset or the owner of asset. 

For clubbing provisions, income includes losses so if any one who has loss during the financial year and such loss has comes under the clubbing provision then losses of such type will be added even if this reduces the net tax liability.

Clubbing provisions

  1. If a person has transferred a profit generating asset without transferring ownership of such asset then the profit amount that is generated out of it will be taxable in the hands of the person who has originally the transferred such profit. For Example: if X has transferred profits that is generated out of his owned house building to his wife without transferring the building then the such profit amount will be taxable in the hand of X instead of Mr X’s Wife because of the clubbing provision.
  1. If any asset transferred to a person by revocable transfer then profit generated out of such transfer will get clubbed in the hands of the transferor who actually transferred the asset. If you want profit from such asset not to be taxable in your hand then the asset transferred should not be a revocable one.
  2. Any remuneration received by a spouse of an individual will get clubbed with the remuneration of that individual if such individual has substantial interest (not less then 20% of voting power in the organization) in the organization from where the spouse has received remuneration. If both husband and wife have substantial interest then remuneration received will get clubbed with the remuneration of husband or wife whose total income excluding such remuneration is higher.

Such clubbing provision will not be attracted if the remuneration is received due to the technical or professional knowledge and experience of the spouse.

  1. If an asset other than house property has been transferred to the spouse then profit generated from such asset will get clubbed in the hands of the person who transferred such asset. This clubbing provision will not be applicable if the asset transferred with an adequate consideration or in connection with an agreement to live apart.

If any asset is transferred to a person for the benefit of your spouse then profit generated out of such asset will be included in the hands of such person who transferred the asset to the extent of benefit provided to the spouse.

  1. If an individual transfer an asset without adequate consideration to such individual’s son’s wife then profit arise from such transfer will be included in the hand of such individual who transferred the asset. If such transfer is with adequate consideration then clubbing provision will not be attracted and the individual’s son’s wife will be taxable.

If an asset is transferred to someone for the benefit of son’s wife then the profit arises from such asset will be included in the hands of such individual who transferred the asset.

  1. If any amount generated by a minor child is not due to his talent, skills or specified knowledge and experience then it will get clubbed in the hands of parents whose income is higher before including the minor child’s income. If the child is suffering from any disability as mentioned under section 80U of the IT act then such amount generated by minor child will not get clubbed.

Clubbing provision has to be kept in mind while calculating tax at the end of the year. Above provision of clubbing will not be applicable to the profit that is generated by the income that gets clubbed in the hands of parents or transferor. For example: If you transferred a profit generated asset to your wife and due to clubbing provision you paid tax on such income and your wife by using the clubbed profit has generated Rs. 5, 000 then such amount of Rs. 5, 000 will not get clubbed in your hand as clubbing provision is not applicable to such amount that is generated out of clubbed income.

2 thoughts on “What is Clubbing – Section 64 of IT Act

  1. RAJENDRA KUMAR

    If amount is tranferred from Dubai or Oman to wife account directly, without involving any indian bank account (NRE or NRO), will still the income generated by wife on such funds will be clubbed. My view is that wife received money from abroad, the money which is not assets still in India, hence assets which is transferred was assets or income generated outside, how come that can be said to be an assets, i.e. “as per clubbing section; it has to be first an assets which is transferred to wife without adequate consideration.” my simple view is that first it has to be an assets as per indian income tax act, and amount which comes from an exchange, money transfer agency directly to wife account, then what is the view of you.
    I am goint by tax language and it is mentioned ” any assets” which ? questinn arises, when income tax act speaks it has to be an assets as per indian income tax act, which is not, so how come tax department say, this was suppposed to be assets of husband and we claim it, to club income generatod, my point is, first there is no assets.

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