Section 60 of Income Tax Act — Clubbing of Income

Tax laws are written to ensure fairness — but sometimes people try to exploit loopholes. One common trick is transferring income to someone else (like a spouse or child) while keeping ownership of the asset. The idea is simple: shift the income to someone in a lower tax bracket to save tax. The Income Tax Act of 1961 anticipated this long ago. That’s where Section 60 of the Income Tax Act comes in. It directly deals with the clubbing of income — the process of adding another person’s income to your own taxable income when certain conditions are met.

Let’s break it down in simple language so you understand not only the rule but also the logic behind it.

What Is Section 60 of Income Tax Act?

Section 60 states that if a person transfers income to someone else without actually transferring the asset that generates that income, the income will still be taxed in the hands of the original owner. In legal terms, all income arising to any person by virtue of a transfer of income, where the ownership of the asset remains with the transferor, shall be included in the income of the transferor."

It’s a safeguard against tax evasion strategies where individuals try to lower their taxable income by diverting earnings while still controlling the source of income.

Clubbing of Income – The Broader Concept

Clubbing of income is not limited to Section 60. It’s a wider principle under the Income Tax Act that prevents tax evasion through transfers to relatives or associates. It ensures that the real owner of income — the one who owns or controls the asset — cannot escape liability simply by showing income in someone else’s name."

In short, clubbing of income is the process of including another person’s income in your taxable income under specific sections like 60 to 64.

Purpose Behind Section 60

The goal of Section 60 is to prevent misuse of the tax structure. It ensures that taxpayers can’t simply divert income to avoid paying higher taxes.

When someone enjoys control over an asset but pretends the income belongs to someone else, the law steps in. This clause maintains integrity in the tax system by taxing income based on ownership, not on paperwork arrangements.

Also Read: Unexplained Credits, Legal Pressure & Case Law Insights

The Core Rule — Transfer of Income Without Transfer of Assets

Section 60 specifically covers cases of transfer of income where there is no transfer of assets.

That means:

• The person making the transfer (transferor) still owns the asset.
• The person receiving the income (transferee) only gets the benefit of the income.
• The transfer can be made through a contract, gift, or declaration.

But since the ownership of the source remains with the original person, the income legally belongs to them & must be taxed accordingly.

Key Ingredients of Section 60

To apply Section 60, three main conditions must exist:

1. There must be a transfer of income.
   The person transfers the right to receive income to someone else.
2. The asset generating the income is not transferred.
   Ownership stays with the transferor.
3. The transfer must be through an agreement or arrangement.
   It can be oral or written but should show intent to transfer income.

If these conditions are met, the law automatically “clubs” that income back into the transferor’s total income.

Difference Between Transfer of Asset and Transfer of Income

This distinction is the heart of Section 60 — the law doesn’t recognize income transfers without asset transfers.

Example 2: Diverting Dividend Income

Suppose Mr. B owns company shares & decides that his minor son will now receive all dividends. He doesn’t transfer the shares — only the right to receive dividends.

In this case, all income arising to any person by virtue of a transfer (the son) will still be added to Mr. B’s taxable income. The company might send dividends to the son, but tax-wise, the income belongs to the father.

That’s how Section 60 works quietly to maintain fairness.

Also Read: Tax on Unexplained Money, Bullion, Jewellery & Valuables

Judicial Views on Section 60

Courts have repeatedly upheld the spirit of Section 60. They’ve clarified that if the transfer of income does not involve the transfer of the source, the transfer is not valid for tax purposes.

The reasoning is simple — taxation follows ownership, not convenience. You can’t earn from an asset & make someone else pay the tax.

Exceptions – When Section 60 Does Not Apply

There are few genuine cases where this rule doesn’t apply:

• When both income and asset are transferred completely & irrevocably.
• When the transfer is part of a genuine business agreement that affects ownership rights."
• When the asset no longer belongs to the transferor in any form.

But if the transfer is temporary, revocable, or made without losing control over the source, Section 60 will trigger automatically.

Relevance of Section 60 in Modern Taxation

While this section was written decades ago, its relevance has only increased with complex financial planning tools like family trusts, gifting, and joint ownership.

Many people still attempt to shift income streams to save taxes. Section 60 ensures that such actions are monitored & corrected.
It is one of the earliest clubbing provisions under Sections 60 to 64, forming the backbone of India’s anti-tax avoidance mechanism.

Example to Understand Section 60

Let’s say Mr. A owns a property that earns ₹1 lakh as rent each year. He decides to “transfer” the rent income to his wife, Mrs. A, but doesn’t actually transfer the ownership of the property itself.

Even though Mrs. A now receives the rent, Section 60 ensures that this income arising to another person by virtue of a transfer is still taxable in Mr. A’s hands — because he still owns the property.

The transfer of income is meaningless unless the asset generating it also changes hands.

Interaction with Other Provisions

Section 60 often works alongside Sections 61, 62, and 63, which deal with revocable transfers of assets, and Section 64, which covers clubbing of income between spouses, minor children, and other relatives. Together, these sections ensure that income cannot be diverted artificially — whether through revocable deeds, joint ownership, or nominal transfers.

They collectively prevent double benefits & tax avoidance through informal arrangements.

Computing Taxable Income – A Practical View

When the Assessing Officer determines taxable income, he follows this sequence:

1. Identify any transfer of income made without the transfer of assets.
2. Verify ownership & control of the source.
3. If ownership remains, club that income back to the transferor’s computation.
4. Apply standard deductions or reliefs that may be deducted in computing a taxpayer’s income for a taxation year as per law.

This systematic approach ensures fairness while computing the correct taxable figure.

Also Read: When Your Spending Turns Into Taxable Income

Section 60 vs Genuine Income Shifts

There’s nothing illegal about gifting money or transferring assets — but transferring just the income stream is where the red flag appears.

For instance, if you gift your property to your spouse & she then earns rental income, that’s genuine. But if you merely assign rent to her name without transferring the property, Section 60 applies, and you pay the tax.

That fine line separates tax planning from tax evasion.

Broader Context – Deduction and Research Incentives

The Income Tax Act also contains provisions that encourage genuine productivity. It allows for deductions while computing taxes for expenses relating to scientific research and provides for a deduction of expenses incurred on scientific research and development activities, including expenditure of a capital nature on scientific research.

These deductions stand in contrast to artificial income transfers — they reward innovation & contribution rather than manipulation.

Final Thoughts

Section 60 of the Income Tax Act is short but powerful. It prevents taxpayers from avoiding taxes by shifting income while keeping ownership of assets. It ensures that all income arising to any person by virtue of a transfer, where there is no transfer of asset, is taxed in the hands of the true owner. In other words, you can’t enjoy the benefits of an asset & push its tax burden onto someone else. This section reinforces a simple principle: taxes follow ownership, not paperwork.

If you’re unsure whether a particular transfer of income might trigger clubbing under Section 60, or if you want to plan your finances without breaking the law, reach out to our experts at CallMyCA.com.
We simplify complex tax provisions, help you stay compliant, and structure your income legally — so you save tax the right way.