A mini-guide through minor's income taxation in India
What's the story
In India, the Income Tax Act of 1961 has specific rules in place to discourage tax evasion through the transfer of income to minors. This article delves into the crucial sections and what they mean for managing a child's finances. Parents and guardians, here is a simple guide on income tax for minors.
Clubbing
Clubbing of minor's income
The IT Act stipulates that a minor's income should be clubbed with the income of the parent who earns more, except when it is earned through manual work or any skill, talent, or specialized knowledge that they possess. So, if your kid earned, say, ₹50,000 from modeling, it will be added to your taxable income.
Exemption
Exemption limit on clubbed income
Despite the clubbing rules, the Income Tax Act does provide a small reprieve. An exemption of up to ₹1,500 per child per year is permitted on the income clubbed with the parent. So, if your kid earns ₹2,000 in interest from savings or investments in their name, ₹1,500 of that amount won't be added to your taxable income.
Special case
Special case: Income from manual work or talent
Income generated by minors through manual labor or by applying their skills and talents is not subjected to clubbing provisions. This fosters an environment where minors can actively participate in creative and professional endeavors without the burden of tax implications on their earnings. For instance, income from painting exhibitions or music recitals by minors is not clubbed with their parents' incomes. Instead, it is taxed separately.
Orphaned minors
Taxation when both parents are not alive
In unfortunate circumstances where both parents are deceased, the income arising to a minor from the transfer of assets will not be clubbed with any other person's income. Instead, it will be assessed separately under specific provisions for such cases. The guardian handling these assets should ensure adherence to tax laws while filing returns for the orphaned minor.
Investment tips
Utilizing specific investments for minors
Investing in financial instruments specifically designed for minors can also contribute to efficient tax planning. Options like Sukanya Samriddhi Yojana (for girl children) provide tax-free returns and are exempt from wealth tax. Likewise, investing in education insurance policies where premiums paid are deductible under Section 80C can lower your taxable income while ensuring your child's future education needs are met.