Clubbing of Income

Income Tax ITR Filing
1

The general concept of taxes is that each individual must pay tax on their earnings. But, there are instances when people plan to transfer assets or income to plan their taxes and avoid tax. Sometimes, they are not aware that even such a practice might attract tax in certain situations.

Even a genuine gift to a friend or relative could have tax implications.

Let’s discuss some insights on this provision of the Income Tax Act.

What is clubbing of income u/s 64?

The event where one individual’s income is added or included with the income of another individual is called clubbing of income.

For example, if a wife’s income is clubbed with her husband’s income and he pays tax on the same, it is called clubbing of income.

This is to ensure that the income earned or assets owned by one person are not diverted to avoid the tax payment. All investments including property, fixed deposits, shares, mutual funds, post office savings, etc are covered as clubbed income.

However, the rules are mandated to discourage this practice, except in case of specified persons & scenarios. Shown below are the common cases:

  1. Minor child: Any income accruing to or earned by a minor child (below 18 years) shall be clubbed in the hands of a higher-earning parent.
    • Tax exemption up to ₹1500 per child can be claimed by the parent.
    • Exception: Income of a disabled child (as under 80U) and minors who earn by their own talent, skill, knowledge, manual work, or experience.
  2. Spouse: Any income of the spouse from investments made in any concern in which the other spouse has a substantial interest shall be clubbed in the hands of the spouse whose income is higher.
    • Exception: Spouses who earn income from their own technical & professional qualifications, knowledge, or experience.
    • A transfer of any property without adequate consideration to a spouse will be clubbed in the hands of the transferor spouse.
  3. Daughter-in-law: Any income from investments/assets earned by a daughter-in-law shall be clubbed in the hands of the transferor.
  4. HUF: If an individual transfers his property to HUF without adequate consideration or converts such property into HUF’s property, then income from such property shall be clubbed in the hands of the individual.

Few Important Points:

  1. Clubbing of income is applicable in case of loss as well.
  2. There would not be any clubbing of the income, earned from the investment of clubbed income. This means there is no clubbing of income in case of interest income from re-investment.
  3. Capital gain on further transfer of the asset by the transferee will be considered as income and it shall be clubbed in the income of the transferor.

Example:

Mr. Patel gifted ₹10,40,000 to his wife. This amount is invested by his wife in the debenture of a company. Will the income from the debenture purchased by Mrs. Patel from gifted money be clubbed with the income of Mr. Patel?

Answer: ₹10,40,000 is transferred to the spouse via gift (i.e., without adequate consideration) and, hence, the provisions of section 64(1)(iv) will be attracted. The provisions of clubbing will apply even if the form of asset is changed by the transferee spouse. In this case, the asset transferred is money, and, subsequently, the form of the asset is changed to debentures, hence, income from debentures acquired from money gifted by her husband will be clubbed with the income of her husband. Thus, interest on the debenture received by Mrs. Patel will be clubbed with the income of Mr. Patel.

Conclusion:
So, correct awareness of the clubbing provisions of the Income Tax Act is crucial since they directly affect the income of individuals

Read more about Clubbing of Income as per Section of Income Tax Act - Learn by Quicko

1 Like
2

Hello,
I am planning to gift a certain amount to my spouse ( e.g X rupees) and she will put in Y rupees from her saving account. The total amount X+Y will be invested in an asset which will generate fixed income in my spouse account.

Query is 1) will the clubbing provision apply here for the income generated from above asset and will it be taxed under the husband’s income
2) if the fixed income which gets generated is again re-invested in an FD by my wife, will the returns be taxed to her income or to the husband’s income.

3

Hey @Raghavendra_Yalkur,

With regard to your queries,

  1. Yes, clubbing shall apply here and you will have to bear the tax liability on the income generated from “X” amount i.e., the amount that was gifted.
  2. If the income earned is reinvested, then your spouse will have to bear the tax liability and clubbing provisions shall not apply.

Hope this helps!

1 Like
5

Hello,
I am planning to form an HUF, where in me and my wife will fund initial corpus of HUF.

  • Will the income generated from investments of this corpus attract clubbing of income in our hands as an individual?
  • Will the reinvestment of gains be taxable only in the hands of HUF?
  • If above both are true, when part money is withdrawn from HUF, whose share of money will be considered as withdrawn ours or HUF’s?
6

Hey @SANKET_POSAM,

An HUF can build a corpus at the time of incorporation. Any capital raised and contributed at the time of incorporation is treated as HUF’s capital and clubbing provisions shall not apply.

The income generated on such capital will be treated as the HUF’s income.

However, if you transfer any personal movable/immovable property to the HUF, any income generated from the property will be clubbed.

Hope this helps!

7

I generally transfer some money every year to my mom (housewife with no other source of income) and dad (retired bank official with pension income), and both of them are senior citizens.

They use the money for their regular expenses, and also invests in stocks. I have two questions -:
1 - Will the clubbing of income be applicable for the money/ income they generate from these stocks?

2 - Do they need to show this income as a “Gift” in their income tax returns, and, do they need to pay any taxes on this income (received as a gift from me).

8

@Surbhi_Pal Tagging for visibility.

9

Hey @rishi535,

No, clubbing provisions will not be applicable here.

Gifts from relatives are exempted from taxes and thus, your mom and dad don’t have to pay any taxes on the money that you transfer to them. If their total income exceeds the basic exemption limit which is ₹3L in case of senior citizens, they need not file an ITR. However, if it does exceed the limit, it is better to show the income under exempt income and file the ITR.

10

@Surbhi_Pal

  1. If I transfer 1 crore to my mom as a gift, and she invests this money in the stock market using her trading account, what are the tax implications when she sells the shares and earns a 10 lakh profit? If she then reinvests the 10 lakh profit into her portfolio, making the total 1.1 crore, will I need to pay any taxes?

  2. I earn a salary of 25-30L per year and plan to invest 15L in the market, aiming to avoid short-term capital gains tax. My current portfolio is approximately 21L. Should I consider forming a partnership firm to minimize tax implications if the first strategy is not viable? Additionally, my mom earns 5.5L from rental income, which I transfer to her, and has 2L in other income.

1 Like
11

If i gift shares to my wife i understand that when she sells the shares clubbing will apply and income will be addes to my [ sender ] tax liability

If she invests all the full amount again in shares (full value by selling the shares , includes profits earned) will clubbing apply in this scenario when the shares are sold - now its all tax liability in the hands of my wife [ receiver]

Thanks
Ash

12

@Surbhi_Pal A reply on this will be useful for others was well.

13

Hi @Ash000,

Once the amount is reinvested, the income arising will not be subject to the clubbing provisions and your wife will have to pay taxes on the same.

14

Thanks for the clarification… appreciate if you can confirm with below example…

First transfer transfer of shares to wife Rs 100 makes Rs 10 profit clubbing applies and profit of Rs 10 husband [ sender ] has to declare in his income tax return…

Now once wife reinvests all Rs 110 [ Rs 100 + 10 profit ] and earns Rs 15 profit now this Rs 15 profit is all taxable in wife name [ clubbing does not apply ]

15

Hi @Ash000,

Yes, this understanding is correct.

16

I have transfered 10lakhs to my wife she puts it in short term FD day 10 days and then that interest is clubbed yo my income say 1000rs…So I shall show 1000rs in my itr then she reinvests the total 10L and 1000rs again in FD for long term thereafter the interest on whole 10 lakhs 1000 rs it should be filed with her itr rite? Can u confirm my statement is right r not

17

@Dew
Your statement is wrong.

Check below example and apply accordingly.

IMG_20250220_223341
IMG_20250220_223341925×540 63 KB

18

But since we are putting the whole amount as FD how is it possible to file seperately the income…Also if the wife invests the whole amount 10 lakhs and 1000rs in FD of joint account of both husband and wife…will the tax be borne by the primary account holder of the joint account.

If the same was invested in mutual fund instead of FD and wife sells share with profit 1000rs and reinvests the whole amount 10lakhs and 1000rs will it be taxed with wife’s itr

19

@CA_Anand_Thakor pls reply

20
  1. Since you are the primary holders of Joint account, entire interest amount taxable in your hands. (You have not transfer any fund to wife’s account separately which mentioned by you in your first question)
  2. Mutual Funds: On amount 10 lakh any gain or loss will clubbed in your hands.
    In future if you booked profit and capital increased to 11 lakh, then gain on 10 Lakh club in husband hand and 1 Lakh include in wife hand.
21

@CA_Anand_Thakor What if wife is the primary account holder of joint account…will it be taxable by her