Many taxpayers think they can reduce tax liability by transferring income in the name of a spouse, child, or another family member. However, the Income Tax Act has clear provisions to prevent such diversion. These rules are known as Clubbing of Income.In simple terms, even if the income is shown in someone else’s name, the law may still “club” it back into your taxable income and you will have to pay tax on it.
If you transfer only the income but not the actual asset, the income remains taxable in your hands.
👉 Example: You own a house property but instruct the tenant to pay rent to your brother. Since the house is still in your name, the rent will be taxed in your hands.
If you transfer an asset but keep the right to revoke or take it back, then the income from that asset will be taxed in your hands.👉 Example: You gift a fixed deposit to your cousin with a condition that you can cancel this arrangement anytime. The interest income will still be taxed in your hands.
If your spouse receives salary, commission, or remuneration from a business/firm in which you have a substantial interest, and your spouse does not possess any professional/technical qualification for that role, then that income will be added to your income.
👉 Example: You are a partner in a firm and your spouse is shown as a paid consultant without relevant qualification. The remuneration will be clubbed with your income.
The income of a minor child (below 18 years) is clubbed in the hands of the parent with the higher income.
Exceptions:
💡 Deduction: An exemption of ₹1,500 per child per year is allowed against such income.
👉 Example: Your 12-year-old daughter earns interest of ₹12,000 from a bank FD gifted by you. This will be clubbed in your income, with a deduction of ₹1,500 available.
The purpose of clubbing provisions is to ensure fairness and prevent tax avoidance through artificial transfers. Otherwise, high-income earners could simply divert income to family members in lower tax slabs and reduce overall tax liability.
Clubbing of income is an important concept every taxpayer should be aware of. Before transferring income or assets within the family, make sure you understand how the income will be taxed. Proper planning within the law is always better than facing penalties later.
👉 Tip for readers: If you are unsure about whether clubbing rules apply in your case, consult a Chartered Accountant before making transfers or investments.
CA Atik Bhayani