Clubbing of income: When it applies, when it doesn't; know rules before sending money to relatives

3 min read | Updated on May 30, 2025, 14:39 IST

SUMMARY

The clubbing provision applies only to individuals. There are specific conditions under the Income Tax Act under which income earned by other individuals (spouse, minor child, etc.) is added to the income of the taxpayer. However, there are some exceptions as well.

If the spouse earns income from assets acquired out of their independent funds, such income is not clubbed. | Representational image source: Shutterstock

You can be taxed for an income earned by another person due to the clubbing of income provision under India's income tax rules. It refers to a situation in which a person is taxed for the income earned by someone else.

The Income Tax Department has introduced the clubbing of income provisions to ensure people don't reduce their taxable income by transferring it to family members in lower tax brackets.

The clubbing provision applies only to individuals. It doesn't apply to other types of assessee like a firm/HUF/Company, etc. There are specific conditions under the Income Tax Act under which income earned by other individuals (spouse, minor child, etc.) is added to the income of the taxpayer. However, there are some exceptions as well.

The following are some of the key provisions of clubbing of income that you should know to avoid unintentional tax evasion and penalties, according to a document titled 'Clubbing of Income under the Indian Income Tax Act, 1961' by the Income Tax Department.

When is the clubbing of income provision applicable?

The clubbing of income provision will apply in the following types of transactions

Transfer of income without transfer of assets [Section 60]: If a person transfers income to another person without transferring the asset, the income will still be taxable in the hands of the transferor.

Revocable transfer of assets [Section 61]: Any income from an asset that can be transferred back to the taxpayer at any point in time is considered a revocable transfer, and the income is taxable in the hands of the transferor.

Income of spouse [Section 64(1)(ii)), 64(1) (iv), 64(1) (vii)]: If an individual transfers any asset to the spouse, not under an agreement to live apart, the income generated from that asset will be clubbed with the transferor's income.

Income from assets transferred to son's wife [Section 64(1)(vi)], 64 (1) (viii)]: Income from assets transferred to the son's wife, either directly or indirectly, is taxable in the hands of the transferor.

Income of a minor child [Section 64(1A)]: The income of a minor child is clubbed with the income of the parent whose income is higher. However, exceptions are allowed for income earned by the minor from manual work or specialised knowledge, etc.

Income from HUF [Section 64(2)]: If a taxpayer converts individual property into a Hindu Undivided Family (HUF) or transfers property to an HUF without adequate consideration, the income from such property is clubbed with the taxpayer's income.

When is the clubbing of income provision not applicable?

The clubbing of income provisions is not applicable in the following cases:

Income from personal skill or manual work: Income earned by a spouse through personal skill or manual work is not subject to clubbing.

Income of a minor child: The income of a minor child, on which clubbing applies, can be reduced by an exemption of ₹1,500 per child, as provided under Section 10(32).

Income of spouse from independent funds: If the spouse earns income from assets acquired out of their independent funds, such income is not clubbed.

How is the clubbed income taxed?

The tax department says the clubbed income is taxed at the rates applicable to the person in whose income another person's income has been clubbed. "The clubbed income is taxed at the applicable rates of the taxpayer in whose hands it is included. This can result in a higher tax liability, especially when income is transferred to individuals in lower tax brackets."