Legal Ways to Avoid Clubbing of Income and Optimize Tax Planning

Investing in Someone Else’s Name Won’t Save Tax: Tax Will Still Be Levied on You

The Income Tax Department recently issued a brochure on clubbing provisions, emphasizing that income is taxable in the hands of the person who actually owns it. Many taxpayers invest in the names of their spouse, children, daughter-in-law, in-laws, etc. to artificially distribute income and gain tax benefits.

However, clubbing provisions prevent such tax evasion and ensure that income from such investments is taxed in the name of the person who transferred the asset or investment. Thus, one must be mindful of these rules when making financial transactions within the family.

Key Clubbing Provisions Under the Income Tax Act

1. Gifting Property to Family Members

If you gift property or money to certain family members, any income earned from it will be clubbed with your taxable income.

2. Relevant Income Tax Sections

Section 60: If an individual transfers an asset without any consideration, the income from that asset will still be taxable in the hands of the transferor.
Section 61: If an asset is transferred under a revocable agreement (which can be canceled later), the income from it will still be added to the transferor’s taxable income.
Section 62: If an asset is transferred under an irrevocable agreement (which cannot be reversed) and the minimum term is six years or more, the income will not be clubbed with the transferor’s income. However, if the term is less than six years, clubbing provisions will apply.
Section 64(1)(ii): If a person arranges salary, allowance, or any income for their spouse from a business or institution they own, this income will be clubbed with the primary earner’s income. However, if the spouse earns based on their own technical or professional skills, the income will not be clubbed. The latest Income Tax Bill also includes technical knowledge and experience under this exemption.
Section 64(1)(iv): If a husband gifts property to his wife, any income earned from it will be added to the husband’s taxable income.
Section 64(1)(vi): If a father-in-law gifts property or money to his daughter-in-law, any income generated will be clubbed with the father-in-law’s taxable income.
- Example: If Ramesh gifts ₹10 lakh to his daughter-in-law Sunita, and she deposits it in a bank earning ₹80,000 as interest, this interest will be taxable in Ramesh’s hands. However, if Sunita reinvests this money and earns further income, that will be considered her own taxable income.
Section 64(1)(vii) & 64(1)(viii): If a person gifts an asset to their minor child or a Hindu Undivided Family (HUF), the income from that asset will be clubbed with the donor’s income.
Section 64(1A): If a minor earns income, it will be added to the income of the parent. However, if the minor earns through their own skill or talent, it will not be clubbed.
Section 64(2): If a person transfers an asset to an HUF, the income generated from it will be clubbed with the transferor’s taxable income.

3. TDS Credit on Clubbed Income

If TDS (Tax Deducted at Source) has already been deducted on the clubbed income, the credit for TDS will be given to the person in whose income it is included.

How to Avoid Tax Clubbing?

✅ Ensure separate sources of income – If family members invest using their own earned money, clubbing provisions won’t apply.
✅ Use an irrevocable trust – Assets transferred through an irrevocable agreement (valid for at least six years) won’t be clubbed with the original owner’s taxable income.
✅ Encourage skill-based income – If a spouse or minor earns through their own professional or technical skills, clubbing won’t apply.

Understanding these provisions is crucial for better tax planning and compliance. 🚀