Clubbing of Income u/s 64 of the IT Act
The main reasons for the provisions in the 1961 Indian Income Tax Act are fairness and less tax evasion. Dotting income belongs to the category of clubbing, which is explained and outlined in Section 64 of the Income Tax Law. In this portion, situations are covered where one person’s income involves income from someone else, often due to specific arrangements they have. It helps prevent taxpayers from moving their earnings to family or others, This article covers details on the clubbing of income u/s 64 of the IT Act. File your Income Tax Returns now with TaxDunia.
Understanding Clubbing of Income
When clubbing happens, the person with the higher income adds their pay to the taxpayer’s and this total amount is taxed as the taxpayer’s income. It is mainly through this section that families are able to transfer income from one member to another, like between spouses or a parent and their minor children.
The main purpose of Section 64 is to avoid cases where individuals avoid paying taxes by artificially sharing their income. Considering these types of income as part of what the taxpayer earns means everyone pays a fair share of taxes and helps limit tax avoidance.
Key Provisions of Section 64
1. Income from Spouse
As per section 64(1)(ii), if someone transfers property to their spouse and does not receive adequate currency or does not live apart from them, the income earned from the asset will be added to the giver’s total income.
For example:
- If Mr. gifts a house to his wife, Mrs. A, and Mrs. the property brings in rental income which Mr. will include in his report. A’s income.
- If there was suitable payment for the transfer, the law does not enforce this rule.
2. Income from a Minor Child
According to Section 64(1A), if a child is a minor, their income will be part of the higher-earning parent’s total income.
- This rule holds unless a child earns money by using their skills, talents, or knowledge.
- You can claim an exemption of ₹1,500 per child per year for clubbed income.
For instance:
- When a parent opens a fixed deposit in a minor’s name and it generates interest, that income will be clubbed with the parent’s income tax.
3. Income from Assets Transferred to Son’s Wife
If a person transfers something to their son’s wife without considering enough value, the income from the asset will be clubbed with the donor’s income.
4. Income from Assets Transferred for the Benefit of Spouse or Son’s Wife
This section also addresses cases where income is generated from assets given to the spouse or the son’s wife unknowingly by the husband. That way, people cannot avoid paying taxes by moving their money indirectly.
5. Cross Transfers
If an asset is transferred between spouses, the income it generates is still clubbed together for tax calculation. This also includes situations where the asset is transferred in a different form. If a spouse gives shares as a gift and the other gives a house, both sources of income will be considered when clubbing takes place.
6. HUF and Clubbing of Income
Clubbing of income occurs when a person transfers assets to an HUF without proper payment, and any earnings from those assets can be treated as the person’s income.
Exceptions to Clubbing of Income
- Adequate Consideration: Profits from assets received in exchange for adequate consideration are not included in clubbing.
- Separation Agreements: These agreements do not apply to cases where property is included in a legal separation agreement.
- Income from Independent Sources: Personal skills, talents, or knowledge-based income of the spouse or minor child cannot be clubbed together with the main income.
Impact of Clubbing Provisions
They help ensure that taxpayers do not send their income to family members in lower tax brackets or to people who are exempt from tax. In addition to curbing avoidance, the provisions change how individuals and financial professionals manage their assets.
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Section 64 helps ensure that transfers of assets or income are not carried out to lower a person’s income tax liabilities. Both taxpayers and financial advisors need to understand Section 64 to guarantee correct tax filing and effective tax strategies. It points out that clear financial management is required, and the government is dedicated to the integrity of tax handling. Let professionals handle your taxes and be at the forefront.
