Find out the taxation liability of a parent if a minor child has an income, whether it is earned or unearned, says Riju Mehta
If your minor child is gifted and is earning through his hobbies or competitions, will this income be tax-free? If not, who pays the income tax? What if he has accumulated a lot of money in gifts from relatives, or the investments you have made in his name are yielding returns? Does he have to file tax returns? Find out the answers regarding your children’s money and its tax implications for you and them.
1.What are the types of income for minors?
Any money received by a minor child can be categorised into two types: earned and unearned. If a child earns it as prize money by participating in competitions, shows and sports, or through his own business, enterprise or part-time job, it will be considered earned income. If, on the other hand, he has amassed funds as gifts from family members, relatives or friends, it will be considered unearned money. This will also include the interest he earns through savings bank accounts, fixed deposits or other investments that have been made in his name by his parents.
2. Is income tax payable on a minor’s income?
Yes, under Section 64 (1A), any money that is received by a child who is less than 18 years of age will be clubbed with the parents’ income and taxed at applicable rates. If both the parents are earning, then the minor’s income will be clubbed with that of the parent whose income is higher. However, tax exemption of `1,500 per child per year for a maximum of two children is available to parents on minors’ income. The parents will pay tax for the minor’s income along with their taxes.
3.Are there exceptions to clubbing of income?
If the minor child is an orphan, that is, both his parents are deceased, then his income will not be clubbed with that of the guardian, but separate tax is paid and income tax returns are also filed separately. Similarly, any income of a minor, who suffers from specified types of disabilities listed under Section 80U, will not be clubbed with that of the parent. The disabilities have to be more than 40% due to diseases like hearing impairment, blindness, mental illness, locomotor disability, etc. If the parents are divorced, then the minor’s income will be clubbed with that of the parent who has the child’s custody. The clubbing of income is also applicable to step children and adopted children.
4.Who files income tax returns for minors?
Since there is no age bar on filing tax returns, a minor has to file tax returns on his income, but his parents can also do it on his behalf. If the returns are being filed by a guardian or a person who is managing his affairs, he will have to upload relevant documents proving his credentials on the income tax website. He can then file the minor’s tax returns as a ‘representative assessee’.
5.Can a minor child have PAN card?
Yes, a minor can have a PAN card and his parents or guardian can apply for the same. In fact, if the minor’s tax returns are being filed independently, he will need to have other information like bank account details, income details, mobile phone number and e-mail account, as well as income tax portal login and password, etc.
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Disclaimer: The advice in this column is not from a licensed healthcare professional and should not be construed as psychological counselling, therapy or medical advice. ET Wealth and the writer will not be responsible for the outcome of the suggestions made in the column.