Mukesh Patel.in
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CLUBBING PROVISIONS FOR MINOR’S INCOME!

Exemption for minor’s income fixed at Rs.1,500 in 1992

Has not been revised even after 20 years of the provision!

Until 1991-92, all income of a minor, other than that covered by the special clubbing provisions of Section 64 of the Income-tax Act was entitled to independent assessment in his own hands. Circumventing the said clubbing provisions not being difficult, a number of avenues for augmenting income and wealth assessable in the minor’s own hands were wide open. It was thus possible to avail of valuable tax savings through the independent tax assessments of minors.

Such independent income/wealth enjoyed by the minors became a source of envy for the Finance Minister, who while introducing the Finance Bill, 1992 struck a major blow on tax planning for minors by providing that all income/wealth of a minor would be liable to be clubbed with the income/wealth of his parent. Section 64(1A) thus provides that “in computing the total income of any individual, there shall be included all such income as arises or accrues to his minor child.”

EXCEPTIONS TO THE CLUBBING PROVISIONS

Two exceptions have been provided in regard to the clubbing provisions. Accordingly, the following income earned by a minor shall be assessed in his own hands and not included with that of his parent:

  • Income derived from manual work done by him.

  • Income derived from any activity involving application of his skill, talent or specialized knowledge and experience (e.g. income of child artistes).

CLUBBING OF INCOME WITH WHICH PARENT?

It has been provided that the income of the minor will be included in the income of that parent whose total income is greater. However, where the marriage of the parents does not subsist, the income of the minor will be includible in the income of that parent who maintains the minor child in the previous year. Further, where any such income is once included in the total income of either parent, any such income arising in any succeeding year shall not be included in the total income of the other parent, unless the Assessing Officer is satisfied, after giving that parent an opportunity of being heard, that it is necessary to do so.

EXEMPTION OF RS.1,500 PER CHILD

Section 10(32) has been inserted to provide that where the income of an individual includes the income of his minor child under the provisions of Section 64, the individual shall be entitled to exemption of Rs.1,500 in respect of each minor child or the income of such minor includible under Section 64, whichever is lower.

Illustration: The income of the minor son and minor daughter of an individual for the Financial Year 2011-12 is Rs.25,000 and Rs.10,000 respectively. Considering an exemption of Rs.1,500 each for both the minor children, the balance income of Rs.32,000 (Rs.35,000 – Rs. 3,000) of the two minors will have to be included in the income of the individual.

POINTS TO CONSIDER FOR MINOR’S INCOME

If clubbing of the minor’s income is attracted in the hands of the individual parent under Section 64(1A), the following important points in relation to the computation of income and tax thereon in the case of the individual must be borne in mind:

  • The income of the minor to be clubbed in the hands of the individual parent is to be understood with reference to the income as determined in the hands of the minor child by applying all the provisions of the Income-tax Act relating to the computation of income under a particular head or from a particular source. Thus, if an investment has been made in the name of a minor from borrowed funds, the interest paid on such borrowing would be deductible from the investment income and only the balance would be liable to be clubbed with the income of the parent.

  • The income of the minor liable to be included with the income of the parent retains the same character even after such inclusion and is accordingly to be offered under the respective head of income. Consequently, appropriate deduction under the Income-tax Act as may be applicable in regard to such income can be claimed in the hands of the parent. For example, an individual can claim 30% standard deduction out of the rental income of his minor child included in his total income.

  • As per the proviso to Section 199 of the Income-tax Act, where the income of a minor is clubbed with that of his parent under Section 64, credit for the tax deducted at source (TDS) in respect of such income would be available to the parent in whose case the income is included for purposes of income-tax.

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