Taxability of Income of Minor

Taxability of Income of Minor:

As we are living in 21^st century, kids / teenagers (minor) of this era are very talented and even more talented than their previous generations.  Now a day kids / teenagers participate in many quiz / contest / tournaments / competitions (singing / dancing) on TV shows and earn handsome income and there are many kids / teenager in whose case they do not earn income by their intellectuals but their parents/grandparents have done investments in their name in the form of Fixed Deposits / Shares / property etc. and they earn income in the form of Interest / Rent / Dividend etc.

So we have seen that kids / teenagers can earn income in two ways:

1. Income earned by minor from manual work or from any activity which includes his own skill, or specialized knowledge or experience

2. Other income

Now twist is coming here. As per section 64(1) of Income Tax Act, 1961, Income earned by Minor child (who has not attained the age of majority i.e. 18 years any time during the financial year) shall be clubbed with the income of parent whose income is higher.

We can summarise the main points of above as follows: 

1. Income of minor child shall be clubbed with his parents

2. Income shall be clubbed with the parent whose income is higher (excluding the income of minor)

3. Minor child include even step child and adopted child also

4. This clubbing provision shall not be applicable if any time during the financial year the minor child has attained the age of 18 years

5. In case the marriage of parents not sustain, then the income of minor shall be clubbed with that parent who take care of minor and maintain him in spite of the fact the his income is lower than the other parent. And where any such income is once included in the total income of any parent, any such income arising in any succeeding year after that shall not be included in the total income of the other parent, unless the Assessing Officer is satisfied, after giving that parent an opportunity of being heard, that it is necessary to do so.

6. And in case no any parent is alive, then clubbing provision of section 64(1) shall not be applicable and minor shall pay tax and file income tax return through his / her legal guardian.

Exemption from clubbing:

Under section 10(32) of Income Tax Act, 1961 an exemption of Rs. 1500 per child (not more than two Childs) shall be provided to the parent in whose income the income of minor is clubbed.

Exception to clubbing provisions under section 64(1) of Income Tax Act, 1961:

Their certain situations in which clubbing provision discussed above are not applicable:

1. Income earned by the minor child suffering from a disability specified in Section 80U of Income Tax Act shall be taxable in the hands of minor himself and shall not be clubbed with any of the parents.

or

2. Income earned by minor from manual work or from any activity which includes his own skill, or specialized knowledge or experience.

However, if above income is invested or utilized otherwise in any other options like fixed deposit / property etc., then any income earned from such investment/ utilisation will be clubbed with the income of parent of such minor as per above discussed section 64(1).

We can understand the above rules with the help of below practical Illustration:

Mr. Albert has three minor children: 

Master X – an artist who earn income by acting / dancing

Master Y – suffering from diseases specified u/s 80U

Master Z – having income in the form of interest on fixed deposits

Income of these minor childs are as follows:

Income of X from stage shows: Rs. 1,00,000

Income of X from bank interest: Rs. 8,000

Income of Y from bank interest: Rs. 1,50,000

Income of Z from bank interest : Rs. 1,15,000

Will the income of minor children be clubbed with the income of their parent, if Income of Mr. Albert is Rs. 3,00,000/- and Income of Mrs. albert is Rs. 1,00,000/-?

As we have discussed above that as per section 64(1A), income of minor children is clubbed with the income of that parent whose income (excluding minor's income) is higher. In the above illustration, Income of Mrs. Albert is less than the income of Mr. Albert, hence, if any income of any minor is to be clubbed then it will be clubbed with the income of Mr. Albert.

1. Income of Rs. 1,00,000/- of minor child X from TV show will not be clubbed with the income of Mr. Albert but income of Rs. 8,000/- of minor child X from bank interest will be clubbed with the income of Mr. Albert
2. Income of Rs. 1,50,000/- of minor child Y who is suffering with diseases covered section 80U of Income Tax Act, 1961 will not be clubbed in the income of Mr. Albert.
3. Income of Rs. 1,15,000/- of minor child Z will be clubbed in the income of Mr. Albert as he is normal minor child.

Hence, net income to be clubbed in the income of Mr. Albert are as follows:

Income of minor child X  Rs. 6,500/- (i.e., Rs. 8,000 – Rs. 1,500)

Income of minor child Y  NIL

Income of minor child Z Rs. 1,13,500/- (i.e., Rs. 1,15,000 – Rs. 1,500)  ​

So total taxable income of Mr. Albert will be:

Rs. 4,20,000/- i.e. Rs. 3,00,000/- (his own income) + Rs. 6,500/- (income of minor child X) + Rs. 1,13,500/- (income of minor child Z)

Tax planning to save from clubbing provisions:

Parents of minor child can adopt any of the following aspects of tax planning to avoid clubbing of income of minor child with them:

1. No interest on loan: No any interest should be given to minor child on the loan given by him to other relatives. By doing this there will be no earning of income and no question of clubbing of income.

2. Investment in land / property not having rental income but prospects of appreciation in value: by doing so there will be no any income in the hands of minor and no any question of clubbing. And land can be sold after being major.

3. Investment in bonds: Funds of minor can be invested in tax free bonds to avoid immediate generation of income in the hands of minor.

4. Investment in shares: Funds of minor can be invested in equity shares of a private / public limited company which can be hold on till the time of getting major to avoid clubbing provisions on capital gain income. (but study the market volatility for long term before choosing such option)

5. Partner in firm: Can make the minor child a partner in any family firm by investing his funds as capital. Do not give any interest on capital till the time of attaining status of major. And any share of income received from partnership firm in the capacity of partner will be exempt u/s 10(32) of Income tax Act, 1961.

6. Investment in PPF account / Sukanya Smridhi Scheme (in case of girl child): Funds of minor child can be invested in these as the interest on these investments keep on accumulated without any tax.