How Family Transfers Can Impact Your Tax Bill – Clubbing of Income

Have you ever thought that gifting an asset to a family member might save you tax? Think again! The Income Tax Department has laid down rules—known as clubbing provisions—that could bring that “gift” back to you in the form of extra tax. In this post, we’ll explain clubbing of income. We’ll discuss why it happens and how transfers, even to your daughter-in-law, can raise your tax bill.

What Is Clubbing of Income?

Imagine you invest in a money-making asset and then transfer it to a relative. You might assume that since the asset is no longer in your name, you’re were not liable for the tax on that asset. However, the Income Tax Act has a safeguard: clubbing of income.Under certain conditions, the income generated by the asset you transferred still gets added back to your taxable income.

Why Does Clubbing of Income Exist?

The primary aim of these provisions is to prevent tax evasion. Taxpayers might be tempted to shift income-producing assets to family members in lower tax brackets to reduce their own tax liability. Clubbing rules ensure that:

• Income isn’t artificially diverted.
• Everyone pays their fair share of tax, regardless of who holds the asset.
• Transparency is maintained in family financial affairs.

Key Provisions Under the Clubbing Rules

Section 60: Transfer of Income Without Transfer of Assets

If you transfer only the income generated from an asset (and not the asset itself) to someone else, you are still considered the owner of that asset.

Section 61: Revocable Transfer of Assets

If you transfer an asset to someone with the option to take it back (i.e., the transfer is revocable), the income generated by that asset is still attributed to you. Since the transfer isn’t permanent, any earnings from that asset are taxed as part of your income.

Section 64(1)(ii), 64(1)(iv), and 64(1)(vii):

When you transfer an asset to your spouse (such as gifting property or investing funds), you will generally have the income generated from that asset added back to your taxable income.

Exceptions: If the asset is transferred for adequate consideration or if there’s a formal agreement (for example, a separation agreement), then these rules may not apply.

Section 64(1)(vi) and 64(1)(viii):

If you give an asset to your daughter-in-law—either directly or indirectly—without receiving enough in return, you will still consider the income from that asset as your own income.

The rule applies only if the relationship (that of a daughter-in-law to you) exists at both the time of transfer and the time the income accrues. For example, if the asset is transferred before your son marries, then the clubbing provisions might not be triggered.

Section 64(1A): Clubbing of Minor Child’s Income

A parent with the higher earnings usually adds the income earned by a minor child to their own income.

Exceptions: There’s a limit on exemptions, like a specific amount per child. This lets you exclude some of the minor’s income from clubbing. If the minor earns income through their own skills (like a performance or creative activity), the parent may not have to club that income with their own.

Section 64(2): Clubbing of Income from Transfers to an HUF

Converting your property into a Hindu Undivided Family (HUF) or transferring an asset to an HUF without proper payment means the income from that asset will count as part of your taxable income. This prevents individuals from misusing attempts to reduce tax liability by shifting assets into an HUF.

Key Changes in Income Tax Bill 2025

The Income-Tax Bill 2025 plans to change the clubbing rules. It will remove one condition and add “qualification” next to knowledge and experience. This change allows taxpayers to claim income from using technical or professional skills. This applies even if they don’t have formal credentials. Currently, spouses with formal technical qualifications are exempt from clubbing if their income stems from their expertise. The new approach focuses on hands-on learning instead of formal education. This could change how families invest and their tax responsibilities. The interpretation and implementation of the rules will determine the actual effect.

Clubbing of income may seem like a tax trap, but with proper planning and a good understanding of the rules, you can navigate these waters safely. Remember, the goal of these provisions is to ensure fairness and curb tax evasion, not to penalize genuine family support. Stay informed, plan smartly, and never hesitate to seek professional advice.

Print