What is Clubbing Provision under Income Tax?
Clubbing provision under Income Tax refers to rules under the Income-tax Act, 1961 that prevent individuals from reducing their tax burden by shifting income to relatives (like spouse or minor child).
Why Clubbing Provisions Exist
Some taxpayers used to transfer assets or divert income to family members in lower tax slabs to save tax.
Key Sections Governing Clubbing of Income
| Section | Applicability | Example |
|---|---|---|
| 60 | Income transferred without transferring the asset | A gifts interest income to spouse but not the FD itself |
| 61 | Revocable transfer of assets | A transfers house rent income but keeps power to revoke transfer |
| 64(1)(ii) | Remuneration to spouse from a concern where individual has substantial interest | Husband owns >20% shares in company, wife receives salary without qualification |
| 64(1A) | Income of a minor child | Interest earned by minor child on gifted money is clubbed with parent |
| 64(2) | Transfer of assets to HUF | Property transferred by member to HUF without adequate consideration |
When Does Clubbing Not Apply?
- Income from transfer of assets before marriage
- Income earned from own skills or talent by spouse
- Minor child’s income from manual work or special skills
- In case of irreversible transfers with no control or benefit to transferor
- After divorce or separation, spousal clubbing ceases
Expert View: Prevent Clubbing with Proper Structuring
“Clubbing can be legally avoided by making genuine gifts with no income link, or using investment instruments where ownership and income are independent,” says a practising CA from Efiletax.
“For minors, investing in tax-free instruments or naming a trust as beneficiary may help reduce tax impact.”
Practical Scenarios Explained
Husband gifts ₹10 lakh to wife, who invests in FD
Father gifts shares to minor son, who earns dividend
Wife earns commission from husband’s business where she’s actively working
- Clubbing doesn’t apply if there’s real work involved and pay is reasonable
How to Avoid Clubbing Provision Legally
- Use separate income sources not linked to gifted assets
- Avoid revocable arrangements – make the transfer permanent
- Invest in instruments exempt from tax (e.g., PPF in child’s name)
- Consider creating a trust for structured asset/income transfer
Clubbing Provision under Income Tax: Summary
Clubbing provision under Income Tax ensures that income diverted to family members is still taxed in the hands of the transferor. It applies in specific cases like spousal income, income of minor children, or revocable asset transfers. Knowing how to structure assets and income can help legally reduce tax without triggering clubbing.
FAQs
Q1. Is gift to spouse taxable?
No, gift is not taxed, but any income from that gift is clubbed.
Q2. What is considered ‘substantial interest’ under Section 64?
Owning 20% or more equity shares in a company.
Q3. Does clubbing apply after divorce?
No. Clubbing provisions don’t apply once the relationship ends legally.
Q4. How to report clubbed income in ITR?
Mention the clubbed income in the taxpayer’s return under “Other Sources” or relevant head.