Direct and Indirect Taxation · Clubbing of Income

Transfer of Income Without Transfer of Asset: Clubbing Rules

Updated 10 October 2026 · Fact-checked

If you transfer only the income from an asset and keep the asset, section 96 of the Income-tax Act, 2025 taxes that income in your hands. If you transfer the asset itself under a revocable transfer, section 97 also clubs the income with you. Check whether the asset moved, then whether the transfer can be revoked.

Understand Transfer of Income Without Transfer of Asset

Clubbing means adding another person's income to your total income. The law does this to stop tax avoidance by shifting income to someone in a lower slab while keeping control of the source.

Section 96 deals with the first trick: you give someone the income but keep the asset. For example, you own shares and direct the dividend to your friend for five years. The shares stay with you. The income is still taxed as yours. It does not matter whether the transfer is revocable or not, or whether it was made before or after the Act began.

Section 97 deals with the second trick: you transfer the asset itself, but keep a string attached. Under section 97(1), income from a revocable transfer of assets is taxed as the transferor's income. Revocable means you can take the asset back, or the transferee's rights can be undone.

Section 97(2) carves out an exception. Clubbing under section 97(1) is avoided only if both conditions are met. First, a trust must not be revocable during the beneficiary's lifetime, and any other transfer must not be revocable during the transferee's lifetime. Second, you must not derive any direct or indirect benefit from the income. The benefit test is the second condition of this exception. It is not a separate clubbing rule.

Section 97(3) then applies irrespective of section 97(2). If a power to revoke arises, the income is clubbed with the transferor as and when that power arises.

So the logic is simple: asset not transferred, income clubbed under section 96. Asset transferred, section 97(1) clubs the income from a revocable transfer. Section 97(2) excludes a transfer that is irrevocable for the stated period and gives the transferor no benefit. Section 97(3) clubs the income when a power to revoke arises.

Key rules to remember

Section 96: income transferred, asset not transferred: Income arising by virtue of a transfer where no asset is transferred → taxed as transferor's income; Applies whether the transfer is revocable or not, and whether made before or after the Act commenced.
Section 97(1): revocable transfer of assets: Income from assets under a revocable transfer → taxed as transferor's income; The asset is transferred, but the transferor can take it back.
Section 97(2): exception: Section 97(1) does not apply if (a) transfer is not revocable during the beneficiary's lifetime (trust) or the transferee's lifetime (other transfer) AND (b) transferor derives no direct or indirect benefit from the income; Both conditions must be met for the exception to apply. If either fails, the exception is not available.
Section 97(3): power to revoke arises: Irrespective of section 97(2), when the power to revoke arises → income taxed as transferor's income; Applies as and when the power to revoke arises, even if section 97(2) was met earlier.

How to solve Transfer of Income Without Transfer of Asset questions

Use this order for any question on transfer of income or revocable transfer.

1Identify what was transferred: only the income, or the asset itself.
2If only the income moved and the asset stayed with the transferor, apply section 96 and club the income with the transferor.
3If the asset moved, check whether the transfer is revocable (by the transferor taking it back or otherwise).
4If revocable, apply section 97(1) and club the income with the transferor.
5If the transfer is not revocable, test the exception in section 97(2). Condition (a): it is not revocable during the beneficiary's lifetime (trust) or the transferee's lifetime (other transfer). Condition (b): the transferor derives no direct or indirect benefit from the income. Clubbing under section 97(1) is avoided only if both are met.
6Separately, check section 97(3). Irrespective of section 97(2), if a power to revoke arises, the income is clubbed with the transferor as and when that power arises.
7Also test other clubbing sections, such as section 99 (spouse, minor child, son's wife), in case they apply to the same facts, and avoid double inclusion.
8Compute the income to be clubbed and add it to the transferor's total income under the right head.

Quickest way: Three-question test

When to use it: Use in MCQs and short-note questions where you must decide quickly whether income is clubbed.

Q1: Did the asset move? No means section 96 and the income is clubbed.
Q2: If yes, can the transfer be revoked? Yes means section 97(1) and the income is clubbed.
Q3: If not revocable, are both conditions of section 97(2) met: irrevocable for the stated period and no direct or indirect benefit to the transferor? Both met means section 97(1) does not club the income. Then check section 97(3): irrespective of section 97(2), the income is clubbed as and when a power to revoke arises. If the benefit condition fails, the exception is not available, so check section 99 and other clubbing provisions for the facts.

Common mistakes in Transfer of Income Without Transfer of Asset

Clubbing income under section 96 only when the transfer is revocable.
Students mix up sections 96 and 97.
Fix: Section 96 covers income transferred without the asset, revocable or not. Revocability matters only in section 97.
Treating only one condition of section 97(2) as enough for the exception.
Students read only the first condition (irrevocability) or only the benefit condition.
Fix: The exception to section 97(1) needs both conditions: irrevocable for the stated period and no direct or indirect benefit to the transferor. If either fails, the exception is not available. Do not say that section 97 itself clubs an irrevocable transfer just because the transferor benefits. Check section 99 and other clubbing provisions for such facts.
Ignoring section 97(3) when a power to revoke arises later.
Students treat the nature of the transfer as fixed at the start.
Fix: Section 97(3) applies irrespective of section 97(2). Re-check whether a power to revoke arises. The income is clubbed with the transferor as and when that power arises.
Clubbing the asset's value instead of the income from it.
Students confuse transferring an asset with taxing it.
Fix: Only the income arising from the asset is included in the transferor's total income, not its value.
Using 'assessment year' or old section numbers from the 1961 Act.
Older books and notes still use the 1961 Act.
Fix: Write 'tax year' and cite sections 96 and 97 of the Income-tax Act, 2025.

Worked examples

Example 1

Mr. Arvind Rao owns 5,000 shares of a company. For 3 years he directs that all dividends on these shares go to his friend Mr. Karthik. The shares remain in Mr. Arvind's name. Dividend for the tax year is ₹40,000. Mr. Arvind's other income is ₹6,00,000. Find the income clubbed and his income after clubbing (before deductions).

Show the solution

The asset (shares) was not transferred. Only the income was directed to Mr. Karthik.
Section 96 applies. Income arising by virtue of such a transfer, where no asset is transferred, is the transferor's income.
Dividend of ₹40,000 is included in Mr. Arvind's total income.
Total = ₹6,00,000 + ₹40,000 = ₹6,40,000.

Answer: ₹40,000 is clubbed under section 96. Mr. Arvind's income after clubbing is ₹6,40,000, before any deductions.

Example 2

Mrs. Meera Iyer transfers a house to her friend Mr. Suresh by a deed. The deed lets her cancel the transfer at any time. Rent from the house is ₹1,80,000 for the tax year. Is the rent taxable in Mrs. Meera's hands? Would your answer change if the transfer were irrevocable during Mr. Suresh's lifetime and Mrs. Meera had no benefit from the income?

Show the solution

The house itself is transferred, so section 96 does not apply. Test section 97.
The transfer is revocable, since Mrs. Meera can cancel it.
Section 97(1): income from a revocable transfer of assets is chargeable as the transferor's income.
So the rent of ₹1,80,000 is included in Mrs. Meera's total income. For the head of income, treat the income according to its nature.
Second case: if the transfer is not revocable during the transferee's lifetime and she derives no direct or indirect benefit, both conditions of section 97(2) are met.
Then section 97(1) does not apply, and the rent is not clubbed. Section 97(3) would apply only if a power to revoke arose later.

Answer: In the first case, ₹1,80,000 is clubbed with Mrs. Meera under section 97(1). In the second case it is not clubbed, subject to section 97(3) if a power to revoke later arises.

Exam tips

Start every answer by stating whether the asset was transferred. This decides between section 96 and section 97.
Quote the two conditions of section 97(2) in your answer. Step marks go to students who test both.
In MCQs, watch for the word 'benefit'. It is the second condition of the section 97(2) exception: if the transferor benefits directly or indirectly, the exception is not available. Also check whether section 99 applies.
Write 'tax year' and cite the Income-tax Act, 2025 section numbers, not the 1961 Act.
State the final clubbed figure clearly and show the total income after clubbing.

Practice questions from Clubbing of Income

Transfer of Income Without Transfer of Asset in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Transfer of Income Without Transfer of Asset: frequently asked questions

What is the difference between section 96 and section 97?

Section 96 applies when income is transferred but the asset is not. Section 97 applies when the asset is transferred. Section 97(1) clubs income from a revocable transfer of assets. Section 97(2) excludes a transfer that is irrevocable for the stated period and gives the transferor no direct or indirect benefit, and section 97(3) clubs the income when a power to revoke arises.

What is a revocable transfer?

It is a transfer where the transferor can take back the asset, or the transferee's rights can be undone. Income from such a transfer is taxed as the transferor's income.

When is income from an asset transfer not clubbed?

Income is not clubbed under section 97(1) when the transfer is not revocable during the beneficiary's or transferee's lifetime, and the transferor gets no direct or indirect benefit from the income. Both conditions must be met.

What happens if a power to revoke arises later?

Under section 97(3), irrespective of section 97(2), the income is clubbed with the transferor as and when the power to revoke arises. This applies even if the transfer was earlier irrevocable.