Clubbing of Income and Aggregation of Income

Question 1:

What do you understand by clubbing of income? In which circumstances is the income of one person added to the income of another person?

The meaning of clubbing of income is to include someone else’s income in one’s own income. In English, this is called "Clubbing of Income."

According to the Income Tax Act, 1961, clubbing of income is covered under Sections 60-64. Under these provisions, the income of one person can be clubbed with another person's income under certain specified circumstances.

(1) Transfer of Property Without Ownership Transfer:

If a person transfers the income from his property to another person without transferring ownership, then the income generated from that property will still be considered the income of the original owner.

This income will be included in the total income of the person who transferred the income but not the ownership.

Example:

If Ram transfers the income from his property to Shyam for five years, but does not transfer ownership of the property, then any income generated from that property will still be considered Ram’s income for tax purposes.

(2) Income of Spouse

If a person has a substantial interest in a company, then any income received by their spouse from that company will be included in the income of the person who has the substantial interest.

Substantial interest means that the person holds at least 20% of the equity shares of the company.

However, if the spouse is receiving the income due to their own professional qualifications and skills, then this provision does not apply.

If a person or their spouse has at least 20% shares in a company, then any income received by the spouse from that company (other than for professional services) will be clubbed with the income of the person holding substantial interest.

Example:

If Shalini's husband owns more than 20% shares in a nursing company, and she also receives income from that company, then this income will be considered her husband's income, unless she receives it for her own professional services.

(3) Income from Transferred Property to Spouse

If a person transfers a property to their spouse without adequate consideration, then any income generated from that transferred property will still be included in the income of the person who transferred it.

Certain Exempted Cases Where Income is Not Clubbed:

In some specific situations, the income generated from transferred property is not included in the income of the transferor.

(i) If the property transfer took place before marriage.

(ii) If the property transfer was done as part of an agreement for divorce settlement.

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(4) Income of a Minor Child:

The income of a minor child is generally clubbed with the income of the parent whose income is higher.

A minor child refers to any biological or adopted child who is below 18 years of age, whether he/she is a son or daughter.

However, the income of grandchildren is not clubbed with the income of grandparents.

If the minor child has income, it is clubbed with the income of their mother or father (whichever has a higher income).

Exemption: Income up to ₹1,500 per child is tax-free.

If the minor earns income from their own skills, t

alent, or work, it is not clubbed with the parent's income.