INTRODUCTION

The Income Tax Act, 1961, is a comprehensive legislation that governs the taxation of income in India. Within its provisions lie certain mechanisms known as "clubbing provisions," which aim to curb tax avoidance by preventing the transfer of income or assets between certain family members. These provisions come into play in cases where individuals attempt to split income among family members or divert income to entities like the Hindu Undivided Family (HUF) to take advantage of more favorable tax treatment.

This article delves into the clubbing provisions under Section 64 of the Income Tax Act, focusing on their applicability to husband, wife, and HUF. We will explore the specific sections that address the attribution of income and assets between spouses and within HUFs, shedding light on the scenarios in which income is deemed to be clubbed with the original owner. Understanding these provisions is crucial for taxpayers to navigate the complexities of tax planning and compliance while ensuring fair taxation on family-related financial transactions.

Join us as we uncover the hidden demon of clubbing provisions and gain insights into how these provisions curb tax evasion and maintain equity in the taxation system. Let's explore the rules and exceptions that govern the clubbing of income between spouses and the treatment of income transferred to an HUF, providing clarity and guidance to taxpayers seeking to remain on the right side of the tax law.

Section 64 of the Income Tax Act, 1961: Clubbing of Income

Clubbing Provisions for Husband and Wife (Section 64(1)): Section 64(1)(iv): "In computing the total income of any individual, there shall be included all such income as arises directly or indirectly— (iv) to the spouse of such individual by way of transfer to the spouse of a capital asset, the income from which is chargeable to tax under the head 'Income from other sources', where the transfer is otherwise than for adequate consideration or in connection with an agreement to live apart."

Explanation for Clubbing Provisions for Husband and Wife: Under Section 64(1)(iv), if an individual (referred to as the "transferor") transfers an asset to their spouse (referred to as the "transferee") directly or indirectly, any income arising from that asset will be clubbed with the income of the transferring spouse. This provision applies when the transfer is without adequate consideration or when it is in connection with an agreement to live apart. The purpose of this provision is to prevent tax avoidance by splitting income between spouses and ensure that the income remains taxable in the hands of the original owner of the asset.

Section 64(1A): "Where, by virtue of the provisions of clause (iv) of sub-section (1), any income arising from a capital asset, being a transfer by an individual to the spouse, becomes the income of the spouse, the income arising from such asset as is relatable to the investment made by the spouse out of his income, if any, chargeable to tax under this Act, shall also be included in the income of the transferor."

Explanation for Extension of Clubbing Provisions for Husband and Wife: Section 64(1A) extends the scope of clubbing provisions for husband and wife. If any income arises from the transferred asset being applied by either spouse for the immediate or deferred benefit of the other spouse, such income will also be clubbed in the hands of the transferring spouse.

Clubbing Provisions for HUF (Hindu Undivided Family) (Section 64(2)): Section 64(2): "Where, at any time during the previous year, any individual (being a member of a Hindu undivided family), after the 31st day of December 1969, transfers his assets to the Hindu undivided family, otherwise than for adequate consideration or in connection with an agreement to live apart, then, notwithstanding anything contained in any other provisions of this Act, the income from such assets shall be included in the total income of the individual."

Explanation for Clubbing Provisions for HUF: Under Section 64(2), any income arising from assets transferred by a member of the HUF to the HUF is deemed to be the income of that member. This provision prevents tax avoidance by transferring income-generating assets to the HUF, where tax rates might be more favorable. The income remains taxable in the hands of the individual member who made the transfer and not in the hands of the HUF.

It's essential for taxpayers to be aware of these clubbing provisions and to plan their finances carefully to avoid unintended tax implications. Consulting a qualified tax professional is advisable for accurate implication of these provisions in your case, You may contact us for the same.

This blog is purely for educational purposes and not to be treated as personal advice. Kindly contact us or consult your CA for further guidence. CONTACT HERE