Tax Tips: Your beloved son is also earning! Who will pay the tax? Know the Income Tax rules on the income of a minor..
Nowadays, children are ahead in all activities along with their studies. Many times, their talent becomes their source of income from an early age. In such a situation, children start earning a lot, sometimes through talent shows and sometimes through platforms like YouTube and Instagram. Many times, parents invest money in the name of their children for their future, and then they also earn a good amount of interest on that. This will also be considered as the income of the child. In such a situation, a big question is whether the child's income comes under the purview of income tax, then who will file the child's income tax return (ITR)? The child himself or his parents?
What does the income tax rule say? (The 'Clubbing of Income' Rule)
Under section 64(1A) of the Income Tax Act, 1961, a general rule has been made which is called 'Clubbing of Income'. According to this rule, if a minor child earns any income, then that income will be added to the income of his parents, and then tax will be levied on it.
Mother or father, whose income will the child's income be added to?
The child's income will be clubbed with the income of the mother or father, whichever has the higher income. For example, if the father's annual income is Rs 10 lakh and the mother's is Rs 7 lakh, then the child's income will be added to the father's income. If the parents are divorced, then the child's income will be added to the income of the parent who is taking care of the child.
A ₹ 1,500 exemption is available
However, there is a small relief in this rule. Under Section 10(32) of the Income Tax Act, parents get an exemption of ₹ 1,500 per year per child. This means that after deducting ₹1,500 from the child's total income, only the remaining amount will be added to the parents' income. Understand this with an example - Suppose, you have made a fixed deposit (FD) in the name of your 10-year-old daughter, from which she got an income of ₹60,000 in interest in a year. Now, how will tax be levied on this?
Total income of the child: ₹60,000
Exemption under section 10(32): ₹1,500
Taxable income (which will be clubbed): ₹58,500
In these 2 special cases, the child will have to file his ITR himself.
The rule of clubbing does not apply everywhere. There are two such special situations mentioned in the Income Tax Act, where the child's income is not added to the income of the parents, and the child has to file his ITR himself (through his guardian).
1. When the child has earned through his hard work or skill
If a child has earned money by using any of his physical talent, skill, art, or special knowledge, then that income will not be clubbed. For example, if a child has won a singing reality show, acted in a film, or earned from a sports tournament, then the rule of clubbing will not apply to his earnings.
2. If the child is suffering from any serious disability
If the child is an orphan, then he will have to file his ITR himself. On the other hand, if the child is suffering from any disability mentioned in Section 80U and the disability is more than 40 percent, then his income will not be added to the income of the parents.
How is the child's ITR filed?
In cases where the child has to file his ITR himself, this process is completed by his parents or legal guardian. For this, it is mandatory to get the child's PAN card made first. While filing ITR, the guardian verifies the return on behalf of the child using his digital signature.
Disclaimer: This content has been sourced and edited from Zee Business. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.
