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Save Yourself from Clubbing Provisions for the Gifts Made in Cash

Meaning of Clubbing

In general, clubbing means including the income of any other person into the Assessee’s total income for the purpose of taxation.

Certain cases have been defined under the Income Tax Act, in which the income of other person is statutorily required to be included in the income of another person. This addition of income is called “Clubbing of Income”.

For example, if a husband transfers some of the income on his wife name to reduce his personal tax burden. Then in such cases, clubbing provision will apply and such transferred income shall be added back into the husband income for computing taxable income.

The reason for introducing clubbing provision is to curb the wrong practice of tax evasions. However, if all the conditions mentioned are satisfied, then the clubbing shall be done irrespective the intention is not to evade tax.

Various Clubbing Provision

Clubbing provision are covered under Section 64 of the Income Tax Act, 1961. As per Section 64, at the time of computing total income of any individual, there shall be included all such incomes as arises directly or indirectly –

Section 64(1)(ii) – To the spouse of such individual by way of salary, commission, fees or any other form of remuneration whether in cash or in kind from a concern in which such individual has a substantial interest. However, clubbing provision shall not be applicable in relation to any income arising to the spouse where the spouse possesses technical or professional qualifications and the income is solely attributable to the application of his or her technical or professional knowledge and experience.

Section 64(1)(iv) – To the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart. However, if an individual transfer any house property to his or her spouse/ minor child otherwise than for adequate consideration, the transferor in that case is deemed to be the owner of the house property so transferred as per Section 27(i) and income shall be taxable in the hand of transferor under Section 27(i) not covered under Section 64(1)(iv).

Section 64(1)(vi) – To the son’s wife, of such individual, from assets transferred directly or indirectly on or after the 1st day of June 1973, to the son’s wife by such individual otherwise than for adequate consideration.

Section 64(1)(vii) – To any person or association of persons from assets transferred directly or indirectly otherwise than for adequate consideration to the person or association of persons by such individual, to the extent to which the income from such assets is for the immediate or deferred benefit of his or her spouse.

Section 64(1)(viii) – To any person or association of persons from assets transferred directly or indirectly on or after the 1st day of June 1973, otherwise than for adequate consideration, to the person or association of persons by such individual, to the extent to which the income from such assets is for the immediate or deferred benefit of his son’s wife.

Section 64(1)(A) – To his minor child, not being a minor child suffering from any disability of the nature specified in Section 80U. However, clubbing shall not apply in respect of such income as arises or accrues to the minor child on account of any—

(a) manual work done by him; or

(b) activity involving application of his skill, talent or specialised knowledge and experience.

Section 64(2) – Where, in the case of an individual being a member of a Hindu undivided family, any property having been the separate property of the individual has, at any time after the 31st day of December, 1969, been converted by the individual into property belonging to the family through the act of impressing such separate property with the character of property belonging to the family or throwing it into the common stock of the family or been transferred by the individual, directly or indirectly, to the family otherwise than for adequate consideration (the property so converted or transferred being hereinafter referred to as the converted property), then, notwithstanding anything contained in any other provision of this Act or in any other law for the time being in force, for the purpose of computation of the total income of the individual under this Act for any assessment year commencing on or after the 1st day of April, 1971,—

(a)  the individual shall be deemed to have transferred the converted property, through the family, to the members of the family for being held by them jointly;

(b)  the income derived from the converted property or any part thereof shall be deemed to arise to the individual and not to the family;

(c) where the converted property has been the subject-matter of a partition (whether partial or total) amongst the members of the family, the income derived from such converted property as is received by the spouse on partition shall be deemed to arise to the spouse from assets transferred indirectly by the individual to the spouse and the provisions of sub-section (1) shall, so far as may be, apply accordingly.

Provided that the income referred to in clause (b) or clause (c) shall, on being included in the total income of the individual, be excluded from the total income of the family or, as the case may be, the spouse of the individual.

Notes: – Property includes any interest in property, movable or immovable, the proceeds of sale thereof and any money or investment for the time being representing the proceeds of sale thereof and where the property is converted into any other property by any method, such other property. Also, income includes loss for the purpose of Section 64.

Also Read – Restrictions on Cash Transaction and Penalties for contravention

Save Yourself from Clubbing Provision for the Gifts made in Cash

There are various ways in which you can save yourself from the above clubbing provision and can do a proper tax planning for saving your taxes.

Transfer assets with adequate consideration

Clubbing provision shall apply only if the transfer is made without adequate consideration. If an individual transfer any asset with adequate consideration then such transaction shall not come under the preview of clubbing.

Example – Husband made a cash gift of Rs. 5,00,000 to his spouse via cheque. His spouse makes a fixed deposit with the said amount in her saving bank account at interest rate of 8%. Interest earned on this fixed deposit shall be taxable in the hands of the husband as per Section 64(1)(iv).

Example – Husband made a cash gift of Rs. 5,00,000 to his spouse via cheque. His spouse makes a total investment in her own business amounts to Rs. 10,00,000 (out of which Rs 5,00,000 was transferred from the cash gift) which incur a loss of Rs 2,00,000 for the year. The propionate loss of Rs. 1,00,000 shall be clubbed in the hands of the husband.

Note: – As per Explanation 3 of the Section 64, for the purposes of Section64(1)(iv) and Section64(1)(vi), where the assets transferred directly or indirectly by an individual to his spouse or son’s wife are invested by the transferee,—

 (i)  in any business, such investment being not in the nature of contribution of capital as a partner in a firm or, as the case may be, for being admitted to the benefits of partnership in a firm, that part of the income arising out of the business to the transferee in any previous year, which bears the same proportion to the income of the transferee from the business as the value of the assets aforesaid as on the first day of the previous year bears to the total investment in the business by the transferee as on the said day

(ii)  in the nature of contribution of capital as a partner in a firm, that part of the interest receivable by the transferee from the firm in any previous year, which bears the same proportion to the interest receivable by the transferee from the firm as the value of investment aforesaid as on the first day of the previous year bears to the total investment by way of capital contribution as a partner in the firm as on the said day

shall be included in the total income of the individual in that previous year.

Example – Husband purchase jewellery worth of Rs 10,00,000 from his wife for a consideration of Rs. 12,00,000. Wife use such proceeds for making fixed deposit into bank account @ 8% per year. In such case only Rs. 16,000 (proportionate interest on the excess payment of Rs. 2,00,000) shall be clubbed in the hands of husband. The remaining interest shall be the income of the wife as it is received on the transfer of asset with adequate consideration and shall not be falls under clubbing provision.

In other words, if spouse transfer an asset such as jewellery, bullion, precious stone, archaeological collections, drawings, paintings, sculptures, share, debentures etc. on the fair market value then the provision of clubbing shall not be applicable. The fair market value of the asset shall be calculated in the similar manner followed for computation of capital gain.

Transfer assets in other relation

Clubbing provision shall apply only if the transfer is made to: –

  • Spouse
  • Son’s wife
  • Minor child (son or daughter)
  • HUF

So, if the transfer is made to other relation such as parents, major son, major daughter or grandchildren etc. then it will not cover under the clubbing provision even if the transfer of asset is without consideration.

Note: –  Income can be clubbed only and only when there is a conclusive proof for the immediate or deferred benefit of his/her spouse or son’s wife for transfer of such assets.

Example – Father made a cash gift of Rs. 10,00,000 to his major son via cheque. His son makes a fixed deposit with the said amount in his saving bank account at interest rate of 8%. Interest earned on this fixed deposit shall not be clubbed in the hands of father and such income shall be taxable in the hands of son.

Relationship of Spouse or Son’s wife shall exist at the time of transfer of assets and at the time of accrual of income

Clubbing provision shall apply one when the relationship of husband and wife or son’s wife shall exist at the time of transfer of assets as well as accrual of income. So, if the relationship doesn’t exist at the time of transfer or at the time of accrual then such income shall not be clubbed in the hands of the individuals.

Example – Fiancé (engaged partner) made a cash gift of Rs. 10,00,000 to his engaged life partner via cheque and make a fixed deposit with the said amount in her saving bank account at interest rate of 8%. Interest earned on this fixed deposit shall not be clubbed in the hands as the relationship of husband and wife does not exist at the time of transfer of assets.

Other Points

  • Any income generated on the loan funds received from the spouse should not be clubbed and shall be taxable in the hands of the spouse to whom such income has been accrued. The only caution is to repay the loan along with the nominal rate of interest. It is advisable to have proper documentary proof for the loan and the repayments.
  • Income generated on the direct or indirect transfer of asset to spouse or son’s wife shall fall under the clubbing provision. However, if any succeeding income is earned on the direct income generated from such transfer of asset then it shall not be clubbed.

Example – If husband transfer Rs. 3,00,000 to his wife account and make an fixed deposit @ 8% in her name then the interest of Rs. 24,000 shall be clubbed in the income of the husband. However, any income earned by investing this Rs. 24,000 shall not be clubbed in the hands of the husband.

Example – If husband transfer Rs. 1,00,000 to his wife account and she deposited such sum of money in her PPF account then the interest earned from PPF shall be clubbed in the hands of her husband but shall not be taxable as it is exempt under Section 10.

  • Where the individual transfers cash to his/her spouse or minor child and the transferee acquires a house property out of such cash, the transferor shall not be treated as deemed owner of the house property. Such transaction will, however, attract clubbing provisions.

Relevant Case Laws

  • If the cash gift made to a minor son has been converted into a house property and such house property is sold after a long period of time then the capital gain on such transfer of house property shall also be clubbed in the hands of the parents – Commissioner of Income Tax v/s Smt. Pelleti Sridevamma (Supreme Court)
  • If the cash gift made to the wife is invested in shares and thereafter the share is sold and sales proceeding is converted into house property then the income from such house property shall also be clubbed in the hands of the husband – Commissioner of Income Tax v/s Nawab Hussain Jah

About Rohit Pithisaria

Rohit Pithisaria is a Practicing Chartered Accountant from Jaipur and been in practice for more than 7 years. He is actively writing from very beginning of his professional career and is author of various tax articles and blogs.

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