Clubbing Minor Child’s Income: What to Report and What to Skip

Bhavika Rajput
5 hours ago
9 min read

Understanding how to report the income of a minor child is an essential aspect of tax filing for parents. Under the Indian Income Tax Act, the income earned by a minor child is subject to specific provisions that determine whether it must be clubbed with the parents' income or treated separately. While the tax law aims to ensure fairness, it can be complex when it comes to minor children, especially regarding income arising from investments, gifts, or other sources. Let us understand the key aspects of minor child income, focusing on how it is treated for tax purposes, the exemptions that apply, and the implications for parents when filing their returns.

What is the Income of a Minor Child?

The income of a minor child refers to any earnings made by the child, including from sources such as investments, savings accounts, gifts, or any business activities they may be involved in. For tax purposes, the Income Tax Act provides specific rules for how such income is treated. This income can be generated from various assets, including but not limited to:

Interest from bank deposits or fixed deposits
Dividends from shares or mutual funds
Income from gifts received in the form of cash or assets
Income from any part-time work or entrepreneurial ventures by the minor

While minors are not typically required to file a tax return due to their age, parents must be aware of how the income is taxed and whether it is subject to clubbing provisions.

Income to Report (Clubbed)

Under the Income Tax Act, if a minor child earns income, it is generally subject to the clubbing provisions. This means the income generated by the minor is added to the parents' income and taxed as part of the parent’s total taxable income.

The following types of income are typically clubbed under the parent's tax return:

Income from assets transferred to the minor child: If a parent transfers assets like money, property, or investments to the child, any income generated from these assets, such as interest or dividends, is clubbed with the parent’s income.
Income from gifts: If the minor receives a gift from the parent, and the income generated from that gift (for example, interest on a gifted sum) is above a certain threshold, it will be added to the parent’s income.
Income from assets or investments made on behalf of the minor child: Income arising from investments made by parents in the child’s name also gets clubbed with the parent's income.

The objective of clubbing provisions is to prevent parents from reducing their tax liability by shifting income to a minor child, as minors are generally not subject to high tax rates.

Income to Skip (Exemptions from Clubbing)

Not all types of minor income are subject to clubbing provisions. There are certain exemptions where the income earned by a minor child is not clubbed with the parents' income and is treated separately. These include:

Income from a minor child’s own work: If the minor child earns income through their own work, such as earnings from a part-time job, freelance work, or any entrepreneurial activity, this income is not clubbed with the parent’s income. For instance, if the minor child is providing services or doing business, the income from these activities will be excluded from clubbing.
Income from certain scholarships and awards: Scholarships or awards received by a minor child for academic or other achievements are exempt from clubbing. These are treated as non-taxable income under the Income Tax Act.
Income from a minor’s investments in their name (if not transferred from parents): If a minor child has independent investments that were made with their own funds or gifts from relatives, the income generated from these investments can be excluded from clubbing provisions.

Exemption Limit for Clubbed Minor Income

The Income Tax Act provides an exemption for the clubbed income of a minor child up to a certain limit. As of the current tax laws:

If the total income of a minor child, which is clubbed with the parents' income, does not exceed ₹1,500 in a financial year, it is not taxed.
In case the minor's clubbed income exceeds this threshold, it is taxed at the applicable tax rates for the parent (the parent in whose income the minor’s income is clubbed).

The exemption threshold allows parents to avoid paying taxes on smaller amounts of minor income. However, if the income crosses this limit, the income is taxed at the parent's rate, which can significantly increase the overall tax liability.

Filing Implications for Parents

Parents must account for the clubbed income of their minor children while filing their income tax returns. The following implications are relevant for parents:

Clubbed Incomeand Taxable Income: If the minor’s income is subject to clubbing, it adds to the parent’s taxable income. This may result in a higher tax liability for the parent.
Deductions: Parents can claim applicable deductions, such as those underSection 80Cor 80D, on their overall taxable income, including the clubbed income.
Income Beyond the Exemption Limit: If the minor’s clubbed income exceeds ₹1,500, it will be taxed as part of the parent’s income, and the parent will be required to pay taxes on the entire amount.
Separate Filing for Minor: If the minor child has earned their own income that isn’t clubbed with the parent’s income, the child may be required to file an ITR if their income exceeds the basic exemption limit. However, this is rare as most minor children do not reach the taxable income threshold.

Conclusion

Understanding how minor child income is treated under the Income Tax Act is crucial for parents to ensure compliance with tax laws and to make informed decisions duringtax filing. While income generated by a minor child through investments or assets transferred by parents is subject to clubbing provisions, certain types of income, such as those earned through the child’s own work, are exempt from these rules. It is essential for parents to report the clubbed income accurately to avoid penalties and ensure the correct tax is paid. Keeping track of the exemption limits and filing implications will help in reducing tax liabilities while ensuring proper compliance.

For anyone looking for assistance in filing taxes and navigating complex tax rules like those involving minor children, it is highly recommended to download theTaxBuddy mobile app for a simplified, secure, and hassle-free experience.

FAQs

Q1: Is all income of a minor child clubbed with the parent’s income?

No, only the income arising from assets transferred by the parent to the minor child or from gifts is clubbed with the parent’s income. If the minor has income from their own work or independent assets, that income is not subject to clubbing. For example, if a minor earns income from a part-time job or from assets they inherit, that income will be taxed in the minor’s name, not the parent’s. However, if the child receives gifts or property from their parents, the income generated from those assets is added to the parent’s total income and taxed accordingly.

Q2: Can I claim deductions for the minor’s income?

Yes, if the income of a minor is clubbed with the parent’s income, the parent can claim deductions for the combined total income. This includes deductions under sections such as 80C, 80D, and others. For instance, if the parent invests in the Public Provident Fund (PPF) or any other eligible scheme, they can claim the deductions for the entire income, including the clubbed minor’s income, provided the investment is made in their name or jointly with the minor.

Q3: What happens if the minor child’s income exceeds ₹1,500?

If the clubbed income from the minor child exceeds ₹1,500, the excess amount is added to the parent’s taxable income and taxed at the applicable tax rate. The clubbing provision applies, and the parent must include the minor’s income in their return. This means that if the minor’s clubbed income exceeds ₹1,500, it will impact the overall tax liability of the parent, and the income will be taxed according to the parent’s tax bracket.

Q4: Do I need to file a separate return for my minor child?

Generally, you do not need to file a separate return for a minor child if their income is clubbed with the parent’s income. The minor’s income is added to the parent’s taxable income, and the tax is calculated accordingly. However, if the minor has independent income beyond the exemption limit, they may be required to file an ITR on their own. For example, if the minor earns from investments or has an income that exceeds the exemption threshold, they might need to file their own return.

Q5: Is the income from gifts given to a minor child taxable?

Income generated from gifts given to a minor child is generally subject to the clubbing provisions if the gifts come from the parents. However, if the gifts are received from other relatives (such as grandparents, uncles, or aunts), the income from those gifts is not clubbed. For example, if a child receives a monetary gift from a grandparent, the income generated from that gift is taxed in the child's name and is not added to the parent’s income.

Q6: Can a minor child file their own ITR?

Yes, a minor child can file an ITR if their income exceeds the basic exemption limit. However, this is rare because most of the time, the minor’s income is clubbed with the parent’s income. In such cases, the parent files the return on behalf of the minor. But if the minor’s income comes from independent work or investments (such as interest income), and it exceeds the exemption limit, they are required to file their return. The minor can file the return with the help of a guardian or through a legal representative.

Q7: What is the exemption limit for clubbed minor income?

The exemption limit for clubbed minor income is ₹1,500. This means that if the total income from a minor child (when clubbed with the parent’s income) does not exceed ₹1,500, it will not be taxable. However, if the combined income exceeds this threshold, the excess amount will be taxed as part of the parent’s income. It is important to keep track of the minor’s earnings and ensure that they remain under the exemption limit to avoid paying taxes on their income.

Q8: Is there any way to avoid clubbing minor income?

Yes, income earned by a minor from their own work or independent investments is exempt from the clubbing provisions. For example, if the minor receives income from a part-time job or owns investments, such as stocks or bonds, that income is not clubbed with the parent’s income and will be taxed in the minor's name. However, income generated from assets or gifts transferred by parents is always subject to the clubbing provisions and is included in the parent's income.

Q9: Are there any penalties for incorrectly reporting minor income?

Yes, there are penalties for incorrectly reporting minor income or failing to comply with the clubbing provisions. If you fail to report the minor’s income correctly or neglect to include it in your return, the tax authorities may impose penalties, which can lead to a higher tax liability. Inaccurate reporting may also trigger a tax audit or scrutiny from the Income Tax Department, resulting in additional penalties or interest on the unpaid tax.

Q10: How can I minimize the tax burden on my minor child’s income?

To minimize tax burden, ensure that the minor child’s income from their own work or independent investments is not clubbed with the parent’s income. By doing so, you avoid increasing the parent’s taxable income. Additionally, keeping the minor’s income below ₹1,500 will help avoid clubbing provisions altogether. If the minor has substantial independent income, you may want to explore tax-saving strategies such as investing in tax-advantaged instruments in the child’s name.

Q11: Can I split my minor child’s income into different categories to reduce taxes?

Splitting a minor child’s income into different categories, such as salary, interest, or gifts, will not change the clubbing provisions if the income is derived from assets or gifts transferred by the parent. However, income from the child’s independent work, such as income earned from part-time employment, is not clubbed with the parent’s income and can be taxed separately. Therefore, if you want to minimize taxes, it is essential to ensure that the child’s income arises from their independent efforts rather than from assets or gifts provided by parents.

Q12: Can the minor child’s income be used to offset the parent's tax liability?

No, the income of a minor child cannot be used to offset the parent’s tax liability. While the parent is required to report the minor's income if it is clubbed with theirs, the child’s income does not reduce the parent's tax liability directly. However, the parent can still claim tax-saving deductions for their own income, such as deductions under Section 80C,80D, etc., which can help reduce their overall tax burden.