The Income Tax Act, 1961 has specified certain cases where income of one person is statutorily required to be included in the income of another person if some conditions are satisfied. This inclusion is known as “Clubbing of Income”.
Clubbing of income described as including the income of any other person in Assessee’s total income.
In the case of individuals, income-tax is levied on a slab system on the total income. The tax system is progressive i.e. as the income increases, the applicable rate of tax increases. Some taxpayers in the higher income bracket have a tendency to divert some portion of their income to their spouse, minor child etc. to minimize their tax burden. In order to prevent such tax avoidance,
Clubbing provisions have been incorporated in the Act, under which income arising to certain persons (like spouse, minor child etc.) have to be included in the income of the person who has diverted his income for the purpose of computing tax liability.
If a husband diverts some part of his income to his wife to reduce his tax burden. Then, such transfers could result in attracting clubbing provisions under the Indian Income-tax laws & such transferred income of a wife is added and taxed as income of the husband only and not his wife.
Under the provisions of Section 64 of Income Tax Act, certain cases clubbing of income are allowed. However, certain restrictions pertaining to specified person(s) and specified scenarios are mandated to discourage this practice.
2. Specified cases where you can club income