You may already be aware of the following facts:-
1. Clubbing of Income rules are applicable u/s 64(1A), and income from any type of investment made on minor's (below 18) name would be included with the parent whose total income (excluding minor’s income) is greater, by accounting it under same income head from which it is earned, even for stepchild or adopted child.
2. In case parents are separated, income of minor will be included in income of maintaining parent in relevant previous year.
3. If marriage of parents subsists, but they don’t maintain minor, then minor's income shall not be clubbed with either parent.
4. If parents are not alive, then minor's guardian will file tax return on its behalf, without income being clubbed in guardian's hands.
5. Income of minor earned on manual work or application of its skill, knowledge, talent, experience, etc. will not be clubbed with income of parent.
6. Income of minor (from all sources) suffering from any disability specified under section 80U will also not be clubbed.
7. However, if such incomes are invested or utilized, then any income earned from such investment/ utilization will be clubbed with income of minor's parent.
8. Under Sec 10(32), a parent is entitled to exemption of 1,500 p.a. for each minor, if income exceeds this amount, or restricted to actual income if lesser.
9. Therefore, while a parent can do investment in minor's name, any income out of this investment should be included in parent with higher income, under same head while filling tax returns, even if minor is a PAN card holder, and can avail tax rebate.
1. Clubbing of Income rules are applicable u/s 64(1A), and income from any type of investment made on minor's (below 18) name would be included with the parent whose total income (excluding minor’s income) is greater, by accounting it under same income head from which it is earned, even for stepchild or adopted child.
2. In case parents are separated, income of minor will be included in income of maintaining parent in relevant previous year.
3. If marriage of parents subsists, but they don’t maintain minor, then minor's income shall not be clubbed with either parent.
4. If parents are not alive, then minor's guardian will file tax return on its behalf, without income being clubbed in guardian's hands.
5. Income of minor earned on manual work or application of its skill, knowledge, talent, experience, etc. will not be clubbed with income of parent.
6. Income of minor (from all sources) suffering from any disability specified under section 80U will also not be clubbed.
7. However, if such incomes are invested or utilized, then any income earned from such investment/ utilization will be clubbed with income of minor's parent.
8. Under Sec 10(32), a parent is entitled to exemption of 1,500 p.a. for each minor, if income exceeds this amount, or restricted to actual income if lesser.
9. Therefore, while a parent can do investment in minor's name, any income out of this investment should be included in parent with higher income, under same head while filling tax returns, even if minor is a PAN card holder, and can avail tax rebate.
However, "clubbing of income rules" can be prevented as follows:-
1. If a parent makes investments on minor's name which matures after attaining age of 18, then any income arising from it is not clubbed in parent's income, as clubbing rules apply only for a minor and is not applicable for major children above 18 years of age.
2. A parent can, therefore, open a minor's bank account for receiving cash gifts, and invest it in minor's own name, preferably in a long-term balanced equity fund, being the first holder, with him being the joint holder, and redeem its units only after minor turns 18 so that any income (gains) on it would not be taxable income of the parent.
3. A parent can also save tax under Sec 80C by investing in PPF or other tax saving post office instruments in minor's name in a similar manner, and redeem them only after minor attains age of 18.
4. In the case of PPF, however, either parent can open an account on behalf of minor, but both cannot open it for same minor.
5. Also, whether parent can invest beyond permissible limit in each account, or invest only up to total permissible limit in accounts of both self and minor taken together, is not totally clear, hence it is safest to follow latter while investing.
6. Grandparents too, whether paternal or maternal, are lineal ascendants of minor, and gifts from them is, therefore, tax-exempt in minor's hands.
7. However, income generated through investment of their gifts will be clubbed with that parent whose income is higher.
8. Thereafter, all other clubbing provisions mentioned above shall also apply.
9. Clubbing of income rules can also be avoided here through same process mentioned above.
10. A tip:- Go for tax-efficient options like PPF, ELSS, and long-term equity-oriented mutual funds in the minor's name at an early age, as it will help you defer tax for years, even decades, besides shifting the tax incidence from you to the minor when he attains majority.
1. If a parent makes investments on minor's name which matures after attaining age of 18, then any income arising from it is not clubbed in parent's income, as clubbing rules apply only for a minor and is not applicable for major children above 18 years of age.
2. A parent can, therefore, open a minor's bank account for receiving cash gifts, and invest it in minor's own name, preferably in a long-term balanced equity fund, being the first holder, with him being the joint holder, and redeem its units only after minor turns 18 so that any income (gains) on it would not be taxable income of the parent.
3. A parent can also save tax under Sec 80C by investing in PPF or other tax saving post office instruments in minor's name in a similar manner, and redeem them only after minor attains age of 18.
4. In the case of PPF, however, either parent can open an account on behalf of minor, but both cannot open it for same minor.
5. Also, whether parent can invest beyond permissible limit in each account, or invest only up to total permissible limit in accounts of both self and minor taken together, is not totally clear, hence it is safest to follow latter while investing.
6. Grandparents too, whether paternal or maternal, are lineal ascendants of minor, and gifts from them is, therefore, tax-exempt in minor's hands.
7. However, income generated through investment of their gifts will be clubbed with that parent whose income is higher.
8. Thereafter, all other clubbing provisions mentioned above shall also apply.
9. Clubbing of income rules can also be avoided here through same process mentioned above.
10. A tip:- Go for tax-efficient options like PPF, ELSS, and long-term equity-oriented mutual funds in the minor's name at an early age, as it will help you defer tax for years, even decades, besides shifting the tax incidence from you to the minor when he attains majority.