Herald: Taxation of children under Income Tax Act

Taxation of children under Income Tax Act

15 Apr 2019 04:19am IST

Report by
Prabhu Verlekar

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15 Apr 2019 04:19am IST

Report by
Prabhu Verlekar

Under Income-Tax Laws, income of minor children ie below 18 years and income of children of major age are treated differently. Minor child’s income is clubbed with that parent whose income is higher irrespective of the source of funds. Major child’s income is assessed independently. 

Under Section 64 (1A), income arising or accruing to a minor child is included in the hands of that parent, whose total income is greater than the other, resulting in higher tax liability. For example, if minor child earns bank interest of Rs 20,000, his father’s income is Rs 4 lakh and mother’s income is 5 lakh, child’s income will be charged in the hand of mother. Once charged it will continue to included in mother’s hand irrespective of her subsequent income.

In case of divorce, minor’s income is included in the income of the parent maintaining minor child. If both parents are not alive, income of the minor is not clubbed with guardian but a separate tax return is filed.

If the child suffers from any specified disabilities or if the income is earned by the minor from manual work or through any activity involving his skill or talent, such as from participating in TV shows, advertising, modelling, singing etc, this income will be assessed in his hands separately.

A paltry deduction of Rs 1500 is available per child, maximum two children

The additional tax liability arising to the parents due to this clubbing provisions can be avoided by making investments on behalf of minor in following modes so as to get tax free income, since there will not be any tax liability on this income even after clubbing.

. Contributions to 15 year Public Provident Fund opened in the name of minor. Annual contribution to these accounts held in the name of parent and child should not exceed Rs 1.50 lakh. This contribution is eligible for deduction from taxable income of the parent. 

. Investment in tax – free bonds issued by government corporations

. Investment in equity shares and equity mutual funds, where dividend is tax free and there is no capital gains tax if sold after 12 months of acquisition, subject to specified limits and subject to conditions.

. Zero rated bonds maturing after the minor attends age of majority.

. Investment in Partnership Firm,where share of profit is tax free.

. Investment in Immovable properties. There is no tax on appreciation of assets.

. Incase of minor daughter, investment can be made in Sukanya Samruddi Scheme where rate of interest is about 9% tax-free and annual investment is tax deductible from parents income within the limit of Rs 1-50 lakh u/s 80C.

When the minor becomes major in a financial year, proportionate income arising to him as major will be taxed independently in his hands as major.

Gifts of any amounts received by an individual including minor from ‘specified’ relatives and upto Rs 50,000 from non-relatives are tax free. ‘Specified relatives’ includes parents, grand-parents, brothers or sisters of either of the parents of the individual. For example,even if one crore is received by a child from ‘specified relatives’, and Rs 50,000 from non-relatives same will not treated as income. However, if more than Rs 50,000 is received from non-relatives say Rs 55,000 the entire amount of Rs 55,000 will be treated as income.

The gifts received by children on the occasion of birthdays, special festival days, during visit of friends or relatives should be deposited separately in his bank account to build Corpus Fund. A diary should be maintained recording names of the donors and relationship to produce before tax authorities in case of inquiry regarding source of investments.

By way of tax planning, income tax file should be opened for the child even as a toddler by obtaining PAN card and a saving bank account. Over the years a substantial corpus can be built in his name to meet the cost of higher education, marriage etc. Earlier one starts investing for the minor the better it is, since corpus will get bigger on account of compounding of interest.
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