Introduction
These days, many people invest money in the name of their kids, using things like fixed deposits, insurance, or government programs. But if these investments make money, like interest from a fixed deposit, it brings up the question of taxes on the child’s earnings.
If someone is below 18, they’re seen as a minor. Even though they can earn money from things like savings accounts or investments in their name, the money is added to their parent’s income. This is called “clubbing of income.” So, the taxes on this money are paid the same way the parent pays taxes on their own income.
Who is a minor?
In India, a minor is generally defined as a person who is below the age of 18 years. This legal definition applies to various aspects, including contractual capacity, employment, and certain rights and responsibilities. It means that individuals who are 18 years old or older are considered adults in the eyes of the law, while those below 18 are classified as minors. It’s important to note that the age of majority can vary for specific legal purposes, so it’s advisable to consult relevant laws and regulations for precise information.
Example
Imagine a scenario where a young girl receives a generous gift of Rs. 6 lakh in the form of a fixed deposit from her grandfather. This fixed deposit earns an interest income of Rs. 45,000. Now, let’s consider the financial situation of her parents.
If both parents are married and earning money, the additional income generated by the fixed deposit (Rs. 45,000) is combined with the income of the parent who has a higher income. So, if the father is earning Rs. 26 lakh and the mother is earning Rs. 24 lakh, the ₹45,000 is added to the father’s income.
However, if the parents are divorced, the rules change a bit. In the case of divorced parents, the income of the minor (the girl in this case) is added to the parent who has custody of the child. It’s important to note that this custodial parent can claim a tax exemption of ₹1,500 for each minor child whose income is clubbed.
Whether the parents are together or divorced determines whose income the girl’s additional money is added to. Additionally, there are tax benefits for the parent taking care of the child, providing a bit of relief in terms of taxation.
When it comes to children earning money from activities like acting or advertisements, the tax rules can be different. In certain situations, the income earned by minors is treated separately instead of being combined with their parent’s income. If a minor earns money through their skills, knowledge, or talent, their parent or guardian needs to file a separate income tax return on behalf of the minor. This person is called the “representative assessee.”
This separate tax filing applies particularly to child artists. So, if a child is involved in acting or similar activities, their parents must file an additional income tax return specifically for the child’s earnings.
A similar rule applies to children who win competitions on TV shows like Little Champ, Master Chef Junior, and others. If the money earned by the minor comes from their own efforts, like manual work, it will be reported only in the minor’s tax return. The income will be subject to tax in the child’s name rather than being combined with the parents’ income.
When children earn money based on their skills or win competitions, the tax rules may require a separate income tax return for the child, and the earnings are taxed in the child’s name.
Example 2
Now, let’s consider the scenario where a minor inherits Rs. 12 lakhs from his grandmother’s will, and his parents invest this amount in bonds, resulting in an annual interest of Rs. 60,000. The minor has a hearing impairment disability. In such cases, the Income Tax Act has specific rules under Section 80U for taxing the income of a disabled child.
Here, the income of the child, despite being a minor, is not combined with the income of the parents. To qualify, the child must have a disability of more than 40%, and this disability could be due to conditions like locomotor disability, hearing impairment, poor vision, mental illness, blindness, and others.
The income generated from the investment will be reported separately in the child’s tax return. To claim the benefit of the hearing impairment disability, a certificate confirming the disability is required. If the disability is more than 40%, the interest income will be taxed in the child’s name. If the total income falls below the basic exemption limit, no tax will be applicable.
However, if the hearing impairment is less than 40%, the interest income will then be clubbed with the parent’s income for taxation purposes. So, the severity of the disability determines whether the child’s income is taxed separately or combined with the parent’s income under these specific provisions of the Income Tax Act.
Example 3
In a different scenario, let’s say a minor inherits Rs. 55 lakhs from his deceased parents, and Reena becomes his legal guardian. Reena decides to invest the inherited amount in various securities and bonds, and the child earns ₹4 lakhs from these investments. Now, let’s understand how this income will be taxed.
In this case, since both parents are no longer alive, a separate income tax return must be filed for the child. Importantly, this income won’t be combined with Reena’s income as the legal guardian. Reena has to take on the role of a “representative assessee” for the minor.
To do this, Reena needs to register as a representative assessee on the income tax website. This involves logging in and providing the necessary documents to verify her credentials. Once the registration is approved, Reena can file the income tax returns on behalf of the minor, reporting the income earned from the investments.
When a minor inherits a substantial amount, and the parents are deceased, the child’s income is treated separately for tax purposes. The legal guardian, in this case, Reena, takes on the responsibility of being the representative assessee and files the income tax return on behalf of the minor.
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Authored by Arghya Sen, 3rd year BALLB Student at Amity University, Kolkata
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