In Indian tax law, certain incomes earned by another person are included in the total income of the taxpayer under specific conditions. This concept is primarily governed by Sections 60 to 64 of the Income Tax Act, 1961. These provisions ensure that individuals cannot avoid taxes by transferring their assets to another person or by arranging the sources of their income in the names of others while retaining control over the income.
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Transfer of Income without Transfer of Asset (Section 60)
If an individual transfers an asset from which income is generated without transferring the asset itself, the income from such an asset is included in the total income of the transferor. For example, if a person retains ownership of a rental property but directs the rental income to be paid to their child, the income is still taxed in the hands of the owner.
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Revocable Transfer of Asset (Section 61)
Income from assets transferred under an agreement that it is revocable or the transfer may be re-assumed by the transferor, is included in the transferor’s total income. A transfer is considered revocable if it contains any provision for the re-transfer directly or indirectly of the income or assets to the transferor, or gives the transferor a right to reassume power directly or indirectly over the income or assets.
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Income from Assets Transferred to Spouse (Section 64)
Income arising from the transfer of an asset to the spouse without adequate consideration is included in the total income of the transferor. This does not apply if the transfer is in connection with an agreement to live apart, or under a bona fide commercial transaction.
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Income from Assets Transferred to Son’s Wife (Section 64)
Similar to the transfer to a spouse, any income from assets transferred to the son’s wife without adequate consideration is included in the total income of the transferor.
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Income of a Minor Child (Section 64(1A))
The income of a minor child is included in the total income of the parent whose total income (excluding the minor’s income) is higher. If the marriage of the parents does not subsist, it will be included in the income of the parent maintaining the minor child. However, this rule does not apply if the minor child earns income due to manual work or any activity involving his skill, talent, or specialized knowledge and experience.
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Clubbing of Income in Case of Revocable Transfer of Asset (Section 63)
This section defines what constitutes a revocable transfer. It includes any arrangement or provision for re-assumption of the asset or income, either directly or indirectly, by the transferor.
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Clubbing Due to Indirect Transfers
If an individual indirectly transfers an asset in such a way that income from the asset is received by their spouse, that income will also be included in the income of the transferor.