Power Point
When do minors have to pay tax on their income?
- Typically, any income that minors get from investments is clubbed with a parent’s income
It is common to invest in your minor child’s name–be it making a fixed deposit (FD), buying an insurance policy or investing in Sukanya Samriddhi Scheme for a girl child. But what if any of these investments result in income, say interest from an FD? What are the tax implications on children’s income?
Any person under the age of 18 is considered a minor. Minors can earn an income from savings in a bank account, fixed deposits or other investments made in their names by their parents. Any income a minor receives is included in the parent’s income. This is known as clubbing of income. Thus the taxes on that income will be paid the same way as the tax on the parent’s income.
Let’s take the case of Alka. Her grandfather gifts her a FD of ₹6 lakh and she earns interest income of ₹45,000 from that. Alka’s father’s income is ₹26 lakh and mother’s income is ₹24 lakh. If the mother and father are both earning, the child’s income will be clubbed with the that of the parent whose income is greater. Hence, Alka’s interest income of ₹45,000 will be added to her father’s income.
However, if the parents are divorced, the minor’s income is added to that of the parent who has custody of the child. It is noteworthy that the parent can claim an exemption of ₹1,500 for each minor child whose income is clubbed.
The taxation is also different in the case of a child who earns from acting, advertisements, etc. There are a few exceptions where the income of minors will be taxed in their own hands instead of clubbing of income. If the minor has earned the income on her skills, i.e., through her knowledge or talent, a separate income tax return shall be filed by the minor’s parent or guardian as representative assessee of such minor. Thus, in the case of child artists, their parents will have to file a separate return of income.
A similar situation will be applicable for children who are winners of TV shows like Little Champ, Master Chef Junior, and others. If the income earned by the minor is through manual work, this kind of income will also be reported in the minor’s return only and will be taxable in his own hands.
Now suppose, Umesh has received ₹12 lakh inheritance from his grandmother’s will. His parents have invested this amount in bonds. Interest on bonds is ₹60,000 per annum. Umesh has a hearing impairment disability. The Income Tax Act has specific provisions for taxation of income of a child who is disabled as per the rules under Section 80U of the Income Tax Act 1961. Such a child’s income will not be clubbed with the parent’s income. In such cases, the minor must have more than 40% disability due to diseases like locomotor disability, hearing impairment, poor vision, mental illness, blindness, etc. Here the income will be reported separately in the child’s return only.
One needs to get a certificate for the hearing impairment disability and if it is more than 40%, then the interest income will be taxed in the child’s hands only and since it is below the basic exemption limit, there will be no tax. However, if the hearing impairment is less than 40%, then the interest income will be clubbed in the parent’s income.
Suppose, Kishore has inherited ₹55 lakh from his parents. Both the parents have unfortunately died and Reena is his legal guardian. Reena has invested the inheritance amount in various securities, bonds, etc. and Kishore’s earnings from the investment is ₹4 lakh. How will this be taxed?
In this case, since both parents are deceased, a separate income tax return needs to be filed for Kishore. It is not clubbed with the guardian’s income. Reena will have to register as a ‘representative assessee’ by logging in to the income tax website and uploading the specified documents to prove her credentials. Once the request is approved and she is registered, she can file the income tax returns of the minor.
All the examples are hypothetical.
Nitesh Buddhadev is founder of Nimit Consultancy.
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First Published:26 Nov 2023, 11:51 PM IST
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