Budget 2017: Time to revisit minor child exemption of Rs 1,500?
In India, traditionally children are gifted cash by family members, relatives and friends, on birthdays, festivals and other ceremonial occasions. Many families would continue to hold some cash in hand at home for future needs. However, the recent
demonetisation has forced families to deposit these into bank accounts. These deposits could have been made into minor children bank account or into the parent's bank account.
Further, this money could have been invested or would continue to remain in the bank account till alternate investments are identified. Either way these deposits and investments would start earning income. As the saying goes, income and taxes always go together. Therefore, let's understand the potential tax implications here.
Let's assume, the money was deposited into either of parent's bank account and in turn transferred to minor children bank account. This could mean interest income earned by/credited into parent's bank account and/or minor children bank account.
First, the parent in whose bank account the money has been deposited, would have an added onus to prove that the money indeed belongs to the minor child and does not qualify as income. This could as well be the scenario even if the money is directly deposited into the minor child's bank account. Say for instance, the deposit made represents cash gifts received by minor child and the value of cash gifts does not exceed Rs 49,999 in a tax year. Thus, the amount deposited per se may not take the colour of taxable income.
However, assuming the first hurdle is passed, even then going by the clubbing provisions of taxation, the interest / investment income needs to be clubbed with the income of the parent who has higher taxable income or the parent under whom the minor income was historically clubbed.
As per the provisions of the income-tax, a nominal exemption under Section 10(32) up to Rs 1,500 is available per child against income of minor child clubbed with the parent. There are no other benefits under the income-tax Act. Further, this limit of Rs 1,500 was fixed way back in 1993 and was never revisited. Even, if we are to adjust this for inflation over the years, the limit of Rs 1,500 needs to be enhanced by at least 5 times.
Further, to ensure that children are exposed to basics of banking early in their life and parents do not go back to the old ways of accumulating cash gifts on behalf of minor children, the Finance Minister should in the ensuing budget look at providing specific tax relief linked to deposits/investments by minor children. The relief could be in the form of additional deduction for income from minor child's bank account in line with say deduction under Section 80TTA currently applicable for interest income from savings bank account. Alternatively, there could be an enhanced exemption of up to Rs 10,000 per child again linked to underlying interest/investment income earned by minors.
As the budget is round the corner, it is expected that the Finance Minister would certainly consider the above and shall propose constructive changes not only to counter the impact of demonetisation and to revisit historical limits but importantly to pave way for inculcating banking habits in children much early on in their life.
Let's assume, the money was deposited into either of parent's bank account and in turn transferred to minor children bank account. This could mean interest income earned by/credited into parent's bank account and/or minor children bank account.
First, the parent in whose bank account the money has been deposited, would have an added onus to prove that the money indeed belongs to the minor child and does not qualify as income. This could as well be the scenario even if the money is directly deposited into the minor child's bank account. Say for instance, the deposit made represents cash gifts received by minor child and the value of cash gifts does not exceed Rs 49,999 in a tax year. Thus, the amount deposited per se may not take the colour of taxable income.
However, assuming the first hurdle is passed, even then going by the clubbing provisions of taxation, the interest / investment income needs to be clubbed with the income of the parent who has higher taxable income or the parent under whom the minor income was historically clubbed.
As per the provisions of the income-tax, a nominal exemption under Section 10(32) up to Rs 1,500 is available per child against income of minor child clubbed with the parent. There are no other benefits under the income-tax Act. Further, this limit of Rs 1,500 was fixed way back in 1993 and was never revisited. Even, if we are to adjust this for inflation over the years, the limit of Rs 1,500 needs to be enhanced by at least 5 times.
Further, to ensure that children are exposed to basics of banking early in their life and parents do not go back to the old ways of accumulating cash gifts on behalf of minor children, the Finance Minister should in the ensuing budget look at providing specific tax relief linked to deposits/investments by minor children. The relief could be in the form of additional deduction for income from minor child's bank account in line with say deduction under Section 80TTA currently applicable for interest income from savings bank account. Alternatively, there could be an enhanced exemption of up to Rs 10,000 per child again linked to underlying interest/investment income earned by minors.
As the budget is round the corner, it is expected that the Finance Minister would certainly consider the above and shall propose constructive changes not only to counter the impact of demonetisation and to revisit historical limits but importantly to pave way for inculcating banking habits in children much early on in their life.
Frequent Question and Ans:
Is minor child’s income clubbed with the income of parent? |How can parent claim TDS deducted on his minor's child income?
Long Title
Is minor child’s income clubbed with the income of parent? |How can parent claim TDS deducted on his minor's child income?
Answer As per section 64(1A) , income of minor child is clubbed with the income of his/her parent (*). Income of minor child earned on account of manual work or any activity involving application of his/her skill, knowledge, talent, experience, etc. will not be clubbed with the income of his/her parent. However, accretion from such income will be clubbed with the income of parent of such minor.
Income of minor will be clubbed with the income of that parent whose income (excluding minor's income) is higher.
If the marriage of parents does not sustain, then minor's income will be clubbed with the income of parent who maintains the minor.
In case the income of individual includes income of his/her minor child, such individual can claim an exemption undersection 10(32)) of Rs. 1,500 or income of minor so clubbed, whichever is less.
(*) Provisions of section 64(1A) will not apply to any income of a minor child suffering from disability specified undersection 80U. In other words income of a minor suffering from disability specified under section 80U will not be clubbed with the income of his/her parent.
Illustration F
Mr. Raja has two minor children, viz., Master A and Master B. Master A is a child artist and Master B is suffering from diseases specified under section 80U. Income of A and B are as follows:
Income of A from stage shows: Rs. 1,00,000
Income of A from bank interest: Rs. 6,000
Income of B from bank interest: Rs. 1,20,000.
Will the income of minor children be clubbed with the income of their parent (Mrs. Raja is not having any income)?
** As per section 64(1A) , income of minor children is clubbed with the income of that parent whose income (excluding minor's income) is higher. In this case, Mrs. Raja is not having any income and, hence, if any income is to be clubbed then it will be clubbed with the income of Mr. Raja.
Income of minor child earned on account of manual work or income from the skill, knowledge, talent, experience, etc., of minor child will not be clubbed with the income of his/her parent. Thus, income of A from stage show will not be clubbed with the income of Mr. Raja but income of A from bank interest of Rs. 6,000 will be clubbed with the income of Mr. Raja.
Income of a minor suffering from disability specified under section 80U will not be clubbed with the income of his/her parent. Hence, any income of B will not be clubbed with the income of Mr. Raja.
The taxpayer can claim an exemption under section 10(32)). Thus, in respect of interest income of Rs. 6,000 clubbed in the income of Mr. Raja, he will be entitled to claim exemption of Rs. 1,500 under section 10(32)), hence, net income to be clubbed will be Rs. 4,500 (i.e., Rs. 6,000 – Rs. 1,500). Deductee files a declaration with the deductor and the deductor reports the tax deduction in the name of the other person in the information relating to deduction of tax referred to in sub-rule (1) of rule 37BA.
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