Clubbing of income refers to a situation when you get taxed on someone else’s income. For example, a wife’s income gets combined with her husband’s and they are taxed together. Recently there was a court case where a husband gifted a share of his property to his wife, who then sold it to a third party. However, the tax department claimed that the husband has to pay income tax on the capital gains from the sale of that property, which falls under the clubbing of income rules.
What about the tax implications for income from assets gifted to son’s wife?
Chartered Accountant Suresh Surana explains that under Section 64(1)(vi) of the Income-tax Act 1961, if an individual transfers an asset directly or indirectly to his son’s wife, without adequate consideration, the income generated from that asset is clubbed with the income of the transferor (the person who transferred it).
Surana also mentions that the same principle applies under Section 64(1)(viii) where the income is routed through another person or entity for the immediate or deferred benefit of the son’s wife.
He points out that any asset transfer such as land or building, shares, mutual funds, fixed deposits, or similar assets falls within the scope of the clubbing provisions, as long as the asset can generate income or appreciate in value when sold later.
Surana says it’s crucial to to note that clubbing happens only when the transfer is made without adequate consideration. Surana says: “If the daughter-in-law acquires the asset by paying its fair market value, the clubbing provisions will not be attracted.”
Surana points out that though Section 64(1) specifically addresses the inclusion of income arising from transfers to a spouse, minor child, and son’s wife, it does not explicitly cover transfers to a daughter who is not a minor.
As a result, according to Surana, transfers made to a daughter are not subject to the clubbing provisions in this Section, which means any income generated from assets transferred to her won’t be included in the transferor’s income.
Surana says: “However, there are exceptions when the daughter is a minor; in such cases, her income may be clubbed with the parent’s income as per the rules for minor children. Once the daughter attains majority, the income will be taxed in her own hands.”
Table showing when clubbing of income tax provisions apply:
| Sr. No. | Transferor | Transferee | Clubbing Applicable? | Section |
| 1 | Father | Daughter | No | — |
| 2 | Step-Mother | Daughter | No | — |
| 3 | Step-Mother | Daughter-in-law | No | — |
| 4 | Step-Father | Son-in-law | No | — |
| 5 | Step-Mother | Son-in-law | No | — |
| 6 | Father | Daughter-in-law | Yes | 64(1)(vi)/ 64(1)(viii) |
Source: CA Suresh Surana
Check out what the income tax department had to say about clubbing of income provisions.
What is clubbing of income?
According to the Income Tax Department brochure, clubbing of income refers to a situation where a person is taxed for the income earned by another person. Under specific conditions, the income earned by other individuals (spouse, minor child, etc.) is added to the income of the taxpayer.
Why clubbing of income?
The Income Tax Department introduced these provisions to ensure people don’t reduce their taxable income by transferring it to family members in lower tax brackets.
Key provisions under clubbing of income
According to the Income Tax Department brochure here are the key provisions under clubbing of income:
- 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 their 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. Exceptions are provided for income earned by the minor from manual work or specialized 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.
Exceptions to clubbing of Income provisions
According to the Income Tax Department brochure, here are the exceptions to clubbing of income tax provisions:
- 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 Rs. 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.
Tax Implications
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.
The income tax department said: “Understanding the provisions of clubbing of income is essential to avoid unintentional tax evasion and penalties. Proper planning and compliance with these rules ensure smoother tax filing and legal tax-saving opportunities.”
If a step-father is gifting an asset to his step-son’s wife, then the clubbing of provisions do not apply
Surana says that in case of a step-father gifting an asset to his step-son’s wife, the clubbing provisions under Section 64(1)(vi) and 64(1)(viii) do not apply.
The provisions of the Income Tax law refers to the ‘son’s wife’ of the individual and does not extend to the step-son’s wife. Surana says that this position was upheld by the Income Tax Appellate Tribunal (ITAT), Madras in the case of Smt. V. Anusuya Devi, where it was held that although the term “child” has been defined to include a stepchild, such a definition applies only to the expression “child” wherever it appears.
Surana says: “It cannot be extended to the term ‘son’, even if a stepson is regarded as a child of the assessee. Statutory expressions must be interpreted in their ordinary sense, particularly in the context of Section 64, which the Supreme Court has emphasized must be strictly construed [Commissioner v. Prem Bhai Parekh (1970) 77 ITR 7 (SC)]. The implications under Section 56(2)(x) of the Income-tax Act in the hands of the recipient of assets i.e. the daughter in law needs to be separately examined.”
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