Clubbing of income

The general rule is that a taxpayer is taxed on his own income. Clubbing is the deliberate exception.

The workbook is candid about why it exists: to counteract a prevalent and growing tendency on the part of taxpayers to dispose of their property or income in favour of other persons in such a manner that their tax liability is avoided or reduced. Gift the fixed deposit to a non-earning spouse, and the interest lands in a nil-rate slab instead of a 30% one. Sections 60 to 64 simply refuse to recognise the arrangement.

The order of operations. This is the part candidates get wrong. The income is first computed in the hands of the recipient under the relevant head, after allowing every exemption and deduction permissible under that head. Only then is the resultant figure clubbed into the transferor's or beneficiary's total income — and it stays under the same head in which it was earned. If the recipient's computation produces a loss, the loss is clubbed too.

Section 60 — income transferred without the asset. If a person transfers the income from an asset while keeping the asset, the income is included in the transferor's total income. The workbook's example: E holds 100 debentures, assigns the right to receive interest on 50 to his nephew and gifts 50 debentures to his son. Interest on the 50 whose income alone was assigned is clubbed with E. Interest on the 50 that were actually gifted is not clubbed, because both asset and income moved — section 60 has no application there.

Section 64 — income of another person. The workbook lists the relationships covered:

• income of the spouse;
• income of the son's wife;
• a minor's income;
• income of any person or association of persons; and
• income from property gifted to a HUF.

Section 64 is also where a minor child's income is clubbed with the parent's.

The rate that applies. The transferor's. The clubbed income is taxed in his slab, not the recipient's.

Mr Ahuja, in the 30% slab, gifts Rs 30,00,000 to his wife, who has no other income. She invests it and earns Rs 1,50,000 of interest in the year.

Without clubbing, that Rs 1,50,000 would sit in her return, be covered by the basic exemption and the section 87A rebate, and attract nil tax. With section 64, it is clubbed into Mr Ahuja's total income and taxed at his slab — 30% plus 4% cess, or Rs 46,800. The gift achieved nothing.

Now the variation the exam prefers. Mr Ahuja instead gifts 50 of his 100 debentures to his adult son and, separately, assigns to his nephew the right to receive interest on the other 50. Each block yields Rs 60,000 of interest.

Change the son to a minor, and the first row flips: under section 64 the Rs 60,000 is clubbed with the parent after all.

Chapter 7 (Concepts of Taxation), section 7.7, sets out the provisions and Chapter 13 applies them to minors. Step 2 of the gross total income computation in section 7.12 is literally "club income of other persons", so the topic reappears in structural questions too. Expect the debenture fact pattern, a spouse-gift computation, and a conceptual question on whether a clubbed loss is also clubbed — it is.

• Compute first in the recipient's hands, then club. Deductions and exemptions available to the recipient under that head are allowed before the figure moves.
• A clubbed loss is clubbed. Clubbing is not restricted to positive income.
• The head of income does not change. Clubbed interest stays income from other sources in the transferor's return.
• Transfer the asset as well as the income and section 60 falls away — but section 64 may still catch it if the transferee is a spouse, son's wife or minor child.
• Sections 60 to 64, not 60 to 63 alone. Sections 60 to 63 cover transferred assets; section 64 covers persons.
• The transferor's slab applies, which is the entire reason the provisions exist.
• Gifting to an adult son or a nephew is generally outside section 64 — the listed relationships are exhaustive.