Section 64(1A): Clubbing of Minor’s income

Introduction:

Under the Indian tax laws, in addition to your own income, income of your minor children is also included in your income under certain circumstances.

Who is treated as a minor child?

 A child who has not attained the age of 18 years is considered as minor for the purpose of this provision. A child also includes a step child, an adopted child and even a minor married daughter who has not attained the age of majority.

In whose hands is the income of the minor to be clubbed?

 Any income which accrues or arises to minor children is required to be clubbed with the income of either of the parents whosoever total income is higher, if the marriage of the parents subsists. The income of the minor child will be clubbed with the income of the same parent in the subsequent years even if income of the other parent becomes higher than the parent with whose income it is being clubbed. 

However, if the marriage of their parents does not subsist, income will be clubbed in the hands of the parent who maintains the child.

Further, where none of the parents is alive, no clubbing provisions shall apply and the minor shall file the return through his/her legal guardian.

Are there any circumstances where the income earned by the minor child would not be clubbed with the parent’s income?

There are certain exceptions under which income of minor will not be clubbed with his/ her parent such as-

1. Income earned by the minor child suffering from a disability specified in Section 80U of Income Tax Act, or 

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

However, if such income is invested or utilized otherwise, then any income earned from such investment/ utilization will be clubbed with the income of the parent of such minor. 

For example, A minor has earned Rs.10000/- out of his own skill and the same is being invested in a bank as fixed deposit. Let us assume that the interest received on FD during the year is Rs.1000/-. Though the income earned by the minor out of his own skill i.e. Rs 10000/- is outside the purview of clubbing provisions, interest income of Rs.1000/- would be clubbed in the hands of either of the parents whosoever income is higher.

How the income earned will be assessed when a minor attains his majority?

It should be remembered that the provisions of clubbing the income of minors would be applicable only till he/she attains majority after which the income earned or accrued will be assessed in their individual capacity. 

Exemption under Section 10(32) in case of Clubbing of Income of a Minor Child:

Where the income of an individual also contains the income of his/her minor child in terms of section 64(1A) of the Income Tax Act, such individual shall be entitled to an exemption of Rupees 1,500 in respect of each minor child.

However, where the income of any minor is less than Rs.1500 then the aforesaid exemption shall be restricted to the income so included in the total income of the individual.

What happens to the TDS deducted on account of a minor child’s income?

TDS can be claimed by the parent with whose income the minor’s income is being clubbed. 

According to Rule 37BA(2), such credit can be claimed by that parent by filing a declaration with the deductor to report such tax deduction in the name of the said parent.”

Tax planning to avoid clubbing:

1. Investment in PPF: A minor can claim this investment as a deduction under 80C. On the other hand, the interest income from this investment won’t be clubbed in the hands of parents since Interest from PPF is completely a “Tax – free” income.

2. Investment in tax-free or tax saving bonds: There are various avenues where the return generated is non-taxable or allowable as a deduction. One should carefully evaluate the alternatives by comparing the risk and returns of the investment.

3. Minor as a partner: Minor can be admitted as partner and as the share income of the partner is exempt, the same won’t be clubbed in the hands of parents.