Taxation rules for the minor child: Is it mandatory to pay?

What are earned income and unearned income with respect to minors?

The income receivable by minors is of two types:-

• Earned money- When the children earn money through their specialized skills, like winning any contest/competition/tournament, etc. This money also includes the salaried amount or income earned through his business or venture.
• Unearned money- When the money is not directly earned by the minor but instead received as a form of a gift from relatives or grandparents, interest income, and income from investments made in their name by the parents, etc. This also includes any interest earned via a saving account, any assets that parents have transferred in his name, or fixed deposits.

---

Is it mandatory for a minor child to file an income tax return?

It is mandatory for everyone to file income tax if they fall under the category where the income is above the basic exemption limit. Minors are also liable to pay taxes. The minor with income can file ITR through the following modes:-

• On his own ITR, i.e., In the minor’s ITR itself.
• Clubbed with the income of parents

As per section 64(1A), any amount a minor receives is included in the parent's income. This is known as “clubbing of Income.” Thus, the taxes on that income will be paid the same way as the taxes on the parent's income.

There are two situations here:-

1. If the minor’s income is less than Rs 1500/year-
   In this situation, the amount won’t be added to the parent’s income. In order to be tax-free, as per Section 10 (32) of the Income Tax Act, the income should be up to ₹1500/- per child, up to a maximum of two minor children. This income can include the amount transferred by a parent, grandparent, or any other person.
2. If the minor’s income is more than Rs 1500/year-
   If the income is more than ₹1500/year, then this income will be clubbed with the parent's income, and the parents will have to pay the tax here. However, a tax exemption of ₹1,500 per child per year for a maximum of two children is available to parents on minors’ income. As per section 64(1A), any amount more than ₹1500/ year that the minor receives is included in the parent's income. This is known as the “clubbing of money.” Clubbing of money is pooling the income of parents and their child (this is implied only for the cases where the child is below 18 years).

Rule for clubbing the income:-

• If both the mother and father are earning, in this case, the child's income will be clubbed with the income of the parent whose income is greater.
• If the parents are divorced, in this case, the minor's income is added to the income of the parent who has custody of the child.
• A separate income tax return is filed for the cases where both the parents of the minor are not alive. A guardian of the minor child can file the income tax return in such cases on behalf of the minor. However, this filing is done separately and is not included in the guardian's income. The guardian must upload the necessary documentation by verifying themselves to the income tax website as a "representative assessee of the minor.
• Clubbing of money is also counted when the minor daughter is married.
• The clubbing provision applies to a stepchild and an adopted child.
• If minors have passed 18 years, they come under the majority. Clubbing of income with parents is not applicable in this case.

There are a few exceptions where Minor's income will be taxed in his hands only:-

1. Expertise or skills - If the minor has earned the income on his skills, i.e., through his knowledge or talent, a separate income tax return shall be filed by the minor's parent or guardian as representative assessee of such minor. For example, the winner of TV shows like Little Champ, Master Chef Junior, and others.
2. Disability - If a child is considered disabled as per the rules under Section 80U of the Income Tax Act 1961, then the child's income will not be clubbed with the parent's income. In such cases, the minor must have more than 40% disability due to diseases like locomotor disability, hearing impairment, poor vision, mental illness, blindness, etc. Here, the income will be reported separately in the child’s return only.
3. Manual Work - If the income earned by the minor is through manual work, this kind of income will also be reported in the minor’s return only and will be taxable in his own hands.

---

Taxation of Minor’s Income from Skill-Based Contests

When a minor child earns income from activities that showcase their skills, talent, or specialized knowledge, such as winning contests like KBC (Kaun Banega Crorepati) in India, they have to pay tax on it. As per Section 115BB of the Act, this income is taxed at a flat rate of 30% without any deduction or exemptions. There is also a 4% health and education cess on the tax amount. The entity that paid this income would have already cut 30% tax plus 4% cess from the prize money. The effective tax rate is 31.2%.

If you are a minor or parent of a minor and need to know the tax implications for the income earned by the child, our Tax Advisory Service can help you manage your taxes. Don’t wait till the deadline; secure your child’s financial future today with our Tax Advisory Service.

---

How to Invest and Save Tax for Minors in India

Parents have the option of investing in bank FDs or post office schemes for their minor child. For mutual funds or equities, there is no bar on investing in the name of a minor, but it involves offline formalities and paperwork. Parents can not make these investments online for their children. To invest in equities, a parent can open a Demat account in the minor’s name. This account lets them buy and hold shares for the minors.

The interest from the investment is usually added to the income of the parent whose income is higher. section 10(32) of the Income-tax Act, the parent whose income includes the minor's income can get a tax deduction of ₹1,500/- or the actual amount of the minor's income added, whichever is less. This deduction is only valid in the old tax regime and not in the new one.

---

What documents are required for a minor to file their own return?

• PAN Card
• Income details ( cheque received, cash received, cash deposits in a bank, etc.)
• Details of savings like fixed deposit interest, savings interest, contribution in funds, etc.
• Active Mobile & Email ID.
• E-filing portal login details
• Updated Bank Details (Name, IFSC Code & Account No.).

---

Which tax slab/rate will apply to child taxpayers for FY 2023-24?

The income tax slabs/rate provided below are the same for all individuals (minors and adults):-

Also, as per the recent Budget 2023-24, the number of income tax slabs has been reduced from 6 to 5 under the new tax regime. The new structure is as follows:-

(Note: These amendments will take effect from 1 April 2024 and will apply to the assessment year 2024-25 and subsequent assessment years.)

---

---