Summary: Clubbing of income under Sections 60 to 64 of the Indian Income Tax Act, 1961, is a provision designed to prevent individuals from reducing their tax burden by transferring income-generating assets, typically to family members, while still maintaining indirect control or benefit. This means income from assets transferred without adequate consideration to a spouse or minor child may still be taxable in the hands of the original transferor. For example, income from assets transferred to a spouse or a minor child (unless earned from manual work or specific talents) can be clubbed. To avoid these provisions, strategies include gifting income-producing assets to major children or parents instead of a spouse or minor child, investing gifted money into tax-free instruments like PPF, ensuring recipients use their own funds for reinvestment to avoid clubbing on reinvested income, creating properly structured trusts, or providing loans with documented interest rates instead of gifts. An exception to clubbing rules applies to minor children’s income earned through manual work, talent, skill, or specialized knowledge, with an exemption of ₹1,500 per child available under Section 10(32).
If you’re not careful, clubbing rules can cause unexpected tax liability. Here’s how to understand and legally avoid such situations.
What is Clubbing of Income?
Under Sections 60 to 64 of the Income Tax Act, 1961, clubbing provisions apply when:
- A person transfers assets without adequate consideration, and
- The income from those assets is earned by another person (like a spouse or minor child),
- But is taxable in the hands of the transferor.
| Scenario | Whose Income is Clubbed? | Relevant Section |
| Transfer of Income without transferring the Asset | Transferor | Sec 60 |
| Revocable transfer of Asset | Transferor | Sec 61 |
| Income of spouse from assets transferred without consideration | Transferor (husband/wife) | Sec 64(1)(iv) |
| Income of minor child (excluding manual work or talent) | Parents with higher income | Sec 64(1A) |
| Income from assets transferred to son’s wife | Transferor | Sec 64(1)(vi) |
| Income from assets transferred to HUF | Individual who made transfer | Sec 64(2) |
How to avoid clubbing of Income? – Legal Strategies
1.Avoid Gifting Income – Producing Assets to Spouse/Minor Children
- Gifts to a spouse or minor child can result in clubbing.
- Instead, consider investing in the name of a major child (age 18+) or parents.
2.Invest in Tax-free instruments for Gifted Money.
- If you still gift money to spouse, invest in tax-free instruments. (e.g. PPF, tax-free bonds).
- Clubbing applies only to income, not capital gains or exempt income.
3. Use separate funds for Investment
- Ensure the recipient of a gift uses their own funds or generates new income before reinvestment.
- The clubbing rule applies only to income arising from the gifted amount – not to income arising from reinvested income.
4. Create a trust
- Form a specific trust with clear beneficiaries and purpose.
- Proper structuring can help avoid clubbing.
5. Use Loans instead of Gifts:
- Instead of gifting assets, give a loan with a reasonable interest rate and clear documentation. Income from such loans won’t be clubbed.
Taxation of minor’s income – Exception
Clubbing does not apply if the income earned by a minor child is due to:
- Any manual work, or
- Talent, skill, or specialized knowledge (e.g., child actors, athletes).
Also, an exemption of ₹1,500 per child is available under Section 10(32).
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