It is essential for parents, guardians, or those who care about minors’ well-being to understand the complexities of determining the amount of income tax that minors are responsible for paying. This knowledge will greatly assist in managing their financial situation effectively. Tax considerations become a factor when individuals under the age of 18 generate income, either from investments or part-time jobs. The purpose of this blog is to make the process easier by providing a step-by-step manual on process of Filing Income Tax Returns for a Minor.
Overview
Technological progress has also advanced the development of children’s learning abilities. Additionally, the accessibility of social media has provided them with numerous chances to connect with the audience in a simpler manner.
If we observe our surroundings, we can observe numerous children engaged in various distinctive occupations and achieving substantial financial success. However, earning income also entails the responsibility of paying taxes.
Filing Income Tax Returns for a Minor, Individuals who are under 18 years old and receive income through various sources need to file return but have certain limitations too.
What is the meaning of earned income and unearned income?
There are two types of income that minors can receive:
- Earned Money: Money that is acquired by children through their specific talents, such as emerging victorious in a contest, competition, or tournament, etc. This sum of money also encompasses the fixed salary or earnings obtained from his business or entrepreneurial pursuit.
- Unearned Money: Money that is not earned directly by the minor, but rather given to them as a gift from family members or grandparents. It can also include income from interests or investments made in their name by their parents. This encompasses the interest accumulated from a savings account, any assets that parents have held in the past, and fixed deposits as well.
Does a minor child have a requirement 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. Filing Income Tax Returns for a Minor 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), of the Income Tax Act, 1961 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 tax on the parent’s income.
- If the income of the minor is below Rs 1500 per year: In this case, it will not be added to your parent’s income. To be exempt from tax under Section 10(32) of the Income Tax Act, that is minor child income tax exemption section, the income to be exempt must be up to Rs. 1500/- per child, maximum of 2 minor children. This income may include money sent to you by your parents, grandparents, or other people.
- If the income of the minor exceeds Rs 1500 per year: If the income exceeds Rs 1,500 per year, this income will be added on the parent’s income and the parent will have to pay tax here. As income of minor child is exempted up to Rs,1500. However, for parents with income of minors, up to two children can avail a tax exemption of Rs 1,500 per year per child.
As per Section 64(1A), any amount received by a minor in excess of Rs 1,500 per annum is included in the parent’s income. This is called the “Money Club”. Club money is the combined income of parents and children (only applies if the child is under her 18 years of age).
Clubbing of Income Rule
- The child income will be clubbed with the income of the parent who earns more.
- The income of child is clubbed with the parents’ income who has a child custody in case of separation of parents.
- In situations where both parents of a minor have passed away, an individual tax return must be filed. In situations like these, the guardian of the underage child has the authority to submit the income tax declaration on behalf of the minor. Nevertheless, this separate filing is not considered as part of the guardian’s total income.
- The pooling of funds is also taken into consideration in the event of a minor daughter’s marriage.
- The clubbing provision is applicable to both a stepchild and an adopted child as well.
- When individuals cross 18 years of age, they are not minor anymore, they are considered part of the adult population. In this case, the clubbing of income with parents does not apply.
Cases in which only Minor’s income will be subject to taxation on their own hands.
As many people have questions that is it is mandatory to Filing Income Tax Returns for a Minor, so following are the cases where minor income will be taxed in their own hands:
- Skills or Expertise: If the minor has gained income through their skills, knowledge, or talent, their parent or guardian should file a separate income tax return on behalf of the minor as the representative taxpayer. An illustration of this could be the victor of various television competitions such as Little Champ, Master Chef Junior, among others.
- Disability: If a child meets the criteria for disability according to Section 80U of the Income Tax Act 1961, their income will not be combined with their parent’s income. In these instances, the minor needs to have a disability exceeding 40% caused by conditions such as locomotors disability, hearing impairment, visual impairment, mental illness, or blindness. In this case, the child’s return will include a separate report for their income only.
- Manual work: If the minor earns income through manual labour, this type of income will be reported solely on the minor’s tax return and will be subject to taxation in their own name.
Taxation on the earnings of minors from contests based on their skills.
If a young individual receives earnings from demonstrating their abilities, talent, or specialized knowledge, such as achieving success in competitions like KBC (Kaun Banega Crorepati) in India, they are required to fulfil tax obligations.
According to Section 115BB of the Act, these earnings are subjected to a fixed tax rate of 30% without any allowances or exemptions. The tax amount additionally incurs a 4% charge for health and education purposes. The percentage at which taxes are levied is 31.2%.
An overview on investing and saving taxes for individuals under the age of 18 in India.
Parents can choose to invest their money in fixed deposit schemes offered by banks or in schemes offered by post offices specifically designed for their underage children. There are no restrictions for investing in mutual funds or equities in the name of a minor, however, the process requires offline procedures and documentation.
Parents are unable to conduct these investments digitally for their offspring. To engage in equity investment, a parent has the option to establish a Demat account under the minor’s name. This account permits the purchase and retention of shares on behalf of underage individuals.
Typically, the interest gained from the investment is combined with the earnings of the parent who possesses a higher income. In accordance with section 10(32) of the Income-tax Act, the parent who includes the income of the minor in their own income can receive a tax deduction of Rs either a sum of 1,500/- or the minor’s actual income, whichever amount is lower, will be included. This deduction can only be used under the old tax system and is not applicable under the new one.
What documents are needed to file their own return?
A person should know how to Filing Income Tax Returns for a Minor in India. Following are the documents required to file income tax return by minor.
- A PAN Card refers to a Permanent Account Number card.
- Details of income such as received checks, cash receipts, and deposits made at a bank.
- Specifics about savings such as interest earned from fixed deposits, interest earned from savings accounts, contributions made to investment funds, and so on.
- Mobile and email ID that is currently in use.
- Login information for the electronic filing portal
- Please provide me with the latest information regarding the bank details: name, IFSC code, and account number.
Examples of taxation of Minor Income
- Let’s dig into this matter advance employing a theoretical case to form it simple for you to get it. Assume a girl gets a blessing of a settled store worth ₹6 lakh from her granddad, which creates an interest income of ₹45,000. The daughter’s father earns ₹26 lakh, whereas the mother earns ₹24 lakh as a salary.
On the off chance that both guardians are earning, the child’s wage will be clubbed with the parent whose pay is higher. Hence, the daughter’s pay of ₹45,000 will be included to her father’s wage.
Be that as it may, within the case of separated guardians, the minor’s salary is included to the parent who has guardianship of the child. It’s worth noticing that the parent can claim a charge exception of ₹1,500 for each minor child whose salary is clubbed.
- Now let’s consider the situation where a minor acquires ₹12 lakhs from his grandmother’s will. His guardians contribute this sum in bonds, which create a yearly interest income of ₹60,000. The minor has a hearing disability inability.
The Income Tax Act has particular arrangements for burdening the salary of a disabled child in Section 80U of Income Tax Act. In such cases, the child’s salary isn’t clubbed with the parent’s wage. The child must have a disability of more than 40% due to conditions like locomotor incapacity, hearing disability, mental illness, visual deficiency, etc. Here, the income will be reported separately in child return.
In order to declare a hearing impairment disability, a certificate must be obtained. Furthermore, if the disability exceeds 40%, the interest income will solely be subjected to taxation for the child. If it goes beneath the standard exception threshold, no tax will be required. Nevertheless, in cases where the hearing impairment is below 40%, the interest income will be combined with the income of the parent.
- Imagine a different scenario in which a young individual receives a sum of ₹55 lakh from his late parents as part of their inheritance, and Reena is appointed as his legal guardian. Reena puts the inherited sum into a range of assets such as stocks, bonds, and others, resulting in the child making a profit of ₹4 lakh from these investments. In this scenario, since both parents have passed away, it is necessary to submit a distinct income tax return for the child.
This return will not be combined with the guardian’s income. Reena must log into the income tax website and submit the required documents to prove her qualifications in order to become a registered “representative assessee”. After receiving approval, she has the authority to submit the minor’s income tax returns.
Takeaway
To sum up, an essential part of promoting financial literacy a responsible financial habit is the important task of making the domain of income tax clear and understandable for young individuals. As we explore the complexities of taxable income, the impact of parental guidance, and the possibility of receiving credits, it becomes clear that taking a proactive approach is crucial. With the information provided in this blog, people can effectively understand the tax environment, encouraging a feeling of fiscal accountability in the upcoming generation. In the end, this knowledge allows minors and their caregivers to make informed decisions and ensures their financial security.
