As India’s household income pattern and economic opportunities change, where family members replace the traditional breadwinners, income tax rules may also apply to minors. And what better time to discuss the topic than on Children’s Day?
A minor’s income is often clubbed with their parent’s income except in the following two situations:
In a digital-first age, where kids are offered many learning opportunities like talent shows, others it is common for a minor to earn money.
Anup Bansal, the chief business officer of Scripbox, a Bengaluru-based financial services company, says that parents must understand “how the tax filing needs to be undertaken if their child is earning an income.”
Under section 64(1A) of the Income Tax Act, 1961, any income arising or accruing to a minor child shall be clubbed (included) in computing the parent's total income unless in certain conditions or instances.
Here are the instances where the income is not clubbed:
● Minor is Using His/Her Skill: Income earned by a minor using their skill, say, a talent show, acting, or any legal job/activity, etc., will be liable for income tax, and they will need to file their own ITRs separately.
Aastha Dhowan, a partner at NA Shah Associates, a Mumbai-based tax firm, said it "does not mean the parents will not have to file their ITR, in such cases, separate income tax return shall be filed by the minor's parent or guardian as representative assessee of such minor."
● Minor is Differently Abled : The income of any minor suffering from any specific disability (u/s 80U) will not be clubbed with the parent’s income.
Mihir Tanna, associate director of SK Patodia and Associates, a Mumbai-based chartered accountancy firm, said individuals suffering from disabilities should file their ITR through a representative assessee (legal guardian, manager, or any other appointed person).
Dhowan pointed out that a person is considered differently-abled when the individual suffers more than 40 per cent of any of these diseases: blindness, poor vision, hearing impairment, locomotor disability, and mental illness.
CA Abhishek Y. Bhavsar, a practicing charactered accountant in Ahmedabad, said, there might be a situation where both the father and mother of a minor child bore his expenses partially and it is not possible to determine who maintained the child during the year and neither parent is agreeing to their liability of including the minor's income in theirs'.
"In this case it may be appropriate to avoid clubbing of that income into any of parent’s income and accordingly the same shall be taxable in the hands of the minor child and the same shall not be clubbed. The said position could be scrutinized by the tax authorities," added Bhavsar.
Suppose a parent bought Rs 1,50,000 worth of fixed deposits for his child or purchased dividend-paying mutual funds or other financial instruments. So, these instruments will yield dividends, interest, etc.
In this case, the child will not file a separate ITR. Instead, interest or dividends earned on these instruments will be clubbed with the parent’s income. However, there is an exemption of Rs 1,500 in this instance.
“If both parents earn, the income will be clubbed with the parent with the highest tax bracket. If the parents are separated, the income will be clubbed with the parent having the child’s custody,” said Bansal.
Pallav Pradyumn Narang, Partner, CNK, a Mumbai based law firm, said clubbing of income provisions are applicable only to a 'minor child' and dependency is not a specified criterion. Therefore the incomes arising from investments gifted by parents shall continue to be taxed in the hands of the parent with greater income till the child reaches the age of majority.
"But after the said minor attains majority age, then any income arising form such gifted investments, will be taxed only in the hands of the major child, even if he is living with parents and also dependent upon them," added Narang.
In cases where the both of the parents of the minor child is dead, then the legal guardian of the said minor child is liable to file the return of such income on behalf of the minor, however "the said income earned by the minor child shall not be included in the income of the respective guardian," said Bhavsar.
The guradian who is representing the child shall be subject to the same duties, responsibilities and liabilities as if the income were income received by or accruing to or in favour of him beneficially, and shall be liable to assessment in his own name in respect of that income, but any such assessment shall be deemed to be made upon him in his representative capacity only.
Bhavsar further added that since the assesse is a minor child so the tax shall will be levied upon and recovered from the guardian in like manner and to the same extent as it would be leviable upon and recoverable from the person (minor child) represented by him.
An 18-year-old child may still be financially dependent on his parents.
Dhowan said that if the child reaches the “major” age but files no return even if the income exceeds Rs 2.50 lakh in a financial year and satisfies certain specific conditions, he may be liable for a penalty.
● If paid an electricity bill of Rs 1 lakh or more
● Incurred foreign travel expenditure of Rs 2 lakh or more
● Deposited Rs 1 crore or more in one or more current bank accounts
● If total sales, turnover, or gross receipts in a business exceeds Rs 60 lakh or total gross receipts in a profession exceeds Rs 10 lakh
● The aggregate of TDS or TCS is Rs 25,000 or more
● Deposit in one or more savings bank accounts, in aggregate, is Rs 50 lakh or more.
If a major child satisfies any of the above cases or other specified cases, ITR will have to be filed, irrespective of the income.
Tanna advises minors to either obtain a PAN card or quote their parents' PAN card (if they have no income chargeable to tax) if they do certain transactions like buying a vehicle or purchasing mutual funds.
To sum up, a minor earning any income using their skill or knowledge, or considered differently disabled under the IT Act, will have to file their TR. But if the minor earns some income from investments done in their name, they need not file ITR. But, parents will have to club the income with their earnings while filing ITR.
