Clubbing of Income — Section 64
Section 64 of the Income Tax Act, 1961 requires certain income earned by a spouse, minor child, or daughter-in-law from assets or businesses transferred by the taxpayer to be included in (clubbed with) the taxpayer's own income, to prevent tax avoidance through income diversion.
Clubbing provisions under Section 64 address the tax planning strategy of shifting income to family members in lower tax brackets by transferring assets or funds to them. The legislature designed these provisions to attribute income back to the original transferor when transfers are made to specified relatives without adequate consideration or in specified circumstances.
Under Section 64(1)(ii), any income arising to the spouse from a concern in which the individual has a substantial interest (holding 20% or more of profits or shares) by virtue of that spouse holding any position in the concern is clubbed with the individual's income, unless the remuneration is paid for technical or professional services and bears a genuine market relationship.
Section 64(1)(iv) clubs income arising to the spouse from assets transferred by the individual directly or indirectly to the spouse, where the transfer was without adequate consideration or not in connection with an agreement to live apart. This is a sweeping provision: if a husband transfers shares to his wife without payment, dividends and capital gains from those shares are attributed back to the husband.
Section 64(1)(vi) applies to assets transferred to a daughter-in-law under similar circumstances. Income from such transferred assets is clubbed in the hands of the individual making the transfer.
For minor children, Section 64(1A) requires income of a minor to be clubbed with the income of that parent whose total income is higher. An exemption of Rs 1,500 per child per year is available under Section 10(32) for such clubbed minor income. Income earned by a minor from manual work or through skill or talent applied by the minor is not clubbed.
The clubbing provisions continue to apply even after the original transferee spouse or child attains majority in certain circumstances. Once an asset transferred to a spouse generates income, that income is clubbed for each assessment year until the asset is disposed of. Investors and business families must carefully document all intra-family transactions to demonstrate adequate consideration was paid where clubbing is sought to be avoided.