Clubbing of Income: Simple Explanation
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What is Clubbing of Income?
Clubbing of income means adding someone else’s income to your own income and paying tax on it. This
happens when people try to avoid tax by transferring income to family members while still enjoying the
benefits.
Why Clubbing of Income?
People may try to reduce their tax by shifting income to family members in lower tax brackets. To stop
this, the tax law says that in some cases, income will still be taxed in the original person’s hands.
Types of Income That Can Be Clubbed
A. Transfer of Income Without Transferring the Asset (Section 60)
If you give income to someone else but keep the asset that generates the income, the income will still
be taxed in your name.
Main points:
1. Income is transferred, but…
2. The asset is not transferred (You still own it).
3. There is a settlement or agreement about transferring the income.
Example:
Mr. A owns a house and gives the rent money to his wife but keeps the house in his name. The rent will
still be taxed in Mr. A’s hands.
B. Revocable or Cancellable Transfer of Assets (Section 61)
If you transfer an asset but keep the right to take it back, then the income from that asset will still be
taxed as your income.
Main points:
1. The asset is transferred, but…
2. You still have the power to cancel the transfer.
Example:
Mr. B gives his shares to his brother but keeps the right to take them back. Any income from these
shares (like dividends) will be taxed in Mr. B’s hands.
C. Salary Paid to Spouse (Section 64)
If you own a big part of a business (20% or more) and your spouse gets paid by that business without
having the required skills, their salary will be added to your income for tax purposes.
Main points:
1. You are an individual taxpayer.
2. Your spouse gets a salary from a company where you have 20% or more interest.
3. The salary is not for professional or technical skills.
Example:
Mr. C owns 30% of XYZ Pvt. Ltd. His wife, Mrs. C, gets a salary as an office manager but has no
experience or qualifications. The salary will be added to Mr. C’s income for tax purposes.
Conclusion
Clubbing of income rules make sure that people don’t escape tax by shifting income to family members.
The tax department checks such cases and adds the income back to the original person’s taxable
income.
