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No kidding around with taxes
May, 28th 2007

With the boom in the Indian economy, various sections of people have benefited immensely. With rising income levels, tax incidences are also on the rise. As a result, people are finding ways to minimise the tax impact on their income. One such way is to shift the stream of income into the hands of a minor so as to get various deductions and exemptions and thereby minimise the tax liability.

However, taxmen are aware of the same and there are provisions in the Income-tax Act to curb such practices. In this article, we have tried to cover various aspects of taxation of income of a minor.

The Act

A minor is a person below 18 years of age. When an individual makes investments in the name of a minor from his/her funds then, as per Section 64(1A) of the Income-tax Act, income earned from such investments is taxable in the hands of the individual and not in the hands of the minor.

These provisions are generally known as clubbing provisions. Thus, if we buy shares or have a fixed deposit or buy property in the name of a minor, then all income earned from these, like dividends, capital gains, interest or rent, will be taxable in the hands of the individual and not in the hands of the minor. If income is received by the minor from grandparents (fathers parents), the income will still be clubbed with the father or mother.

Exempt Income

It may be noted that if the income is exempt-income such as dividend from companies, long-term capital gain on sale of shares, interest on PPF account, tax-free bonds or agricultural income, the clubbing provisions will not be impacted.

Mom Or dad?

The minors income will be clubbed with that parents income who is earning more than the other. Further, once the minors income is included in the total income of one parent, it will continue to be included in the total income of the same parent in the subsequent years, unless the income-tax officer is satisfied with the necessity to alter the same.

However, when the marriage of the parent does not subsist, then the income will be clubbed with that parent who maintains the minor in that year. As per Section 10(32), a deduction of Rs 1,500 is allowed to the parent with whom the income of the minor is to be clubbed.

Club Class

Is all income earned by the minor always clubbed and taxable in the hands of the parent? This is not the case all the time. Certain income earned by the minor is taxable in the minors hands only. Such income includes money earned by the minor through manual work or any activity involving application of his skill, talent or specialised knowledge or income arising to a minor suffering from disability specified under Section 80U.
A parent can invest/deposit in the minors PPF account, but the total deposit, including in the parents accounts, cannot exceed Rs 70,000. As per the Indian Partnership Act, 1932, a minor can be admitted to the benefits of partnership only and not to the losses of the firm.

The income of the firm is taxable in the hands of the firm and therefore, share of profit is exempt in the hands of the minor and other partners. Therefore, there is no question of clubbing such income.


Here too the same clubbing provisions are applicable. However, gifts received in kind are not be taxed as income. Any gift received will be taxable and accordingly will be clubbed in the hands of the parent.

Appreciating assets

If the minors funds are invested in non or low-income generating but appreciating assets like gold, diamond articles, shares of blue-chip companies, residential properties for self-occupation etc., wealth for the minor would be created.

However, certain assets like gold jewellery are liable to wealth tax if the value exceeds Rs 15 lakh. If a trust is created for the minor, income of which is to be accumulated and given to him after attaining majority, clubbing provisions will not apply.

Nimesh I Vora
Bombay Chartered Accountants Society

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