Minors income usually clubbed with parents

All parents want the best for their children. However,sometimes we overlook our tax implications which may arise on account of income accruing on such investments.

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All parents want the best for their children. However,sometimes we overlook our tax implications which may arise on account of income accruing on such investments.

In India,a person below 18 years is considered a minor. As per the Indian tax law,income earned by such a minor,barring a few exceptions,is not assessed separately and has to be clubbed with the income of his parents. A minor may also be a step-child or an adopted child. Let us understand under what circumstances the clubbing provisions would apply and how the income to be included is computed.

How clubbing works

The income of a minor from all sources is to be clubbed in the income of the father or the mother,whosoever has a higher income. However,where the marriage of the parents does not subsist,the income is to be clubbed in the income of that parent who maintains the minor.

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Further,where such an income of the minor is included in the total income of either parent in a tax year,any income in any succeeding year should be included in the income of the same parent,unless the necessity of doing otherwise is established to the satisfaction of the tax authorities.

The income of the minor should be included under the relevant heads of income while computing the gross income of the parent. All the prescribed exemptions available,with respect to such head of income,will also apply to the income of the minor. The provision of clubbing of income applies irrespective of whether or not the father/ mother of the minor has made any gift to such minor.

Marginal relief

An ad-hoc exemption up to Rs 1,500 is allowed to the parent,out of the clubbed income,with respect to each minor whose income is included. However,in case the income of any minor is less than Rs 1,500,the aforesaid exemption is restricted to the income so included in the parents income.

Income not subject to clubbing

In a few cases,a minors income is taxed separately and should not be clubbed with that of the parents. If a minor suffers from a specified disability,his income is assessed separately,considering the specified deductions available to such individuals. Secondly,the clubbing will not apply in case the minors income is through manual work done by him. The clubbing will also not apply in case a minors income comes from any activity involving application of his own skill,talent or specialised knowledge and experience. In computing the tax on income of such a minor,normal tax rates and income thresholds applicable for any individual assessee,would apply. With a clear understanding of clubbing provisions,one could factor the tax implications at the time of planning mobilisation and investment of funds for the minor.

* The writer is executive director (Tax),KPMG