It is very natural to build a corpus by investing in the name of child or children. We feel proud doing this. We also feel duty-bound for the future benefit of the child. So, money-wise we want to be ready. When parents or guardians invest in the name of a minor child in India, specific rules govern the taxation of such investments.

Understanding these rules while investing in the name of child will help you in tax planning and compliance.

Clubbing of Income Rules for Minors in India

What is Clubbing of Income? 

Under Section 64(1A) of the Income Tax Act, 1961, any income earned by a minor child (below 18 years) is generally clubbed with the income of the parent whose total income (excluding the child’s income) is higher.

This ensures that parents do not use their children’s accounts to evade taxes.

Tax Exemption for Minor’s Income

If the minor’s income is clubbed with the parent’s, an exemption of ₹1,500 per child per annum is available under Section 10(32). This is applicable for up to two children.

Income from Investing in the name of child

Parents often invest in the name of their children through fixed deposits, mutual funds, or other financial instruments. The income generated from these investments (interest, dividends, etc.) is typically clubbed with the parent’s income. However:

1. Tax-Saving Opportunities:
   • Parents can invest in tax-free instruments like the Public Provident Fund (PPF) or Sukanya Samriddhi Yojana (for daughters) to save tax.
   • Capital gains on investments transferred to a child are taxed in the hands of the parent making the transfer.
2. Separate Tax Liability Upon Majority:
   • Once the child turns 18, their income is taxed independently. Investments made in their name before this age can provide them with tax-free or low-tax income if managed effectively.

Exceptions to Clubbing of Income Provisions

1. Income from Acting, YouTube, or Special Cases

If a minor earns income through activities like acting, being a social media influencer, or running a YouTube channel, the tax treatment is different. Here’s how:

1. Taxation as Individual Income:
   • Income earned through personal skill or talent is taxed as the minor’s own income under the applicable slab rates.
   • They must file an independent income tax return using their PAN card.
   • Expenses incurred for earning this income (e.g., production costs for YouTube videos) can be deducted before computing taxable income.
2. Parental Role:
   • Parents may act as guardians for operational and financial decisions, but the earnings remain attributable to the minor.
3. Tax Deduction at Source (TDS):
   • Companies paying the child (as a freelancer or talent) may deduct TDS under Section 194J or 192A if applicable.

2. Child Disability Exemptions 

The Indian government provides tax relief to parents or guardians of children with disabilities under Sections 80DD and 80U.

1. Section 80DD:
   • Deduction for parents or guardians who incur expenses on medical treatment, training, or rehabilitation of a dependent child with a disability.
   • Deduction limit:
     • ₹75,000 for a disability of 40% or more.
     • ₹1,25,000 for severe disability (80% or more).
2. Section 80U:
   • Deduction for individuals with disabilities, including minor children earning income independently.
   • Similar limits of ₹75,000 and ₹1,25,000 apply.
3. Certification:
   • A medical certificate from a certified medical practitioner is mandatory to claim these deductions.

3. Income from Inherited Assets

When a child inherits income or assets due to the demise of parents, the taxation rules differ:

1. Tax-Free Inheritance:
   • Inheritance of assets (cash, property, or shares) is not taxable in India under the Income Tax Act. However, subsequent income generated from these inherited assets is taxable.
2. Tax Treatment of Income:
   • Rental income from an inherited property or dividends from inherited shares is taxable as per the minor’s income slab rate.
3. Guardian’s Role:
   • If the child is a minor, a legal guardian will manage the inherited income or assets until the child turns 18.

Strategic Tax Planning for Investing in the Name of Child

1. Use Tax-Free Investments:
   • Instruments like Sukanya Samriddhi Yojana (for daughters), PPF, and tax-free bonds ensure tax savings without triggering clubbing provisions.
2. Gift Planning:
   • A gift from relatives like grandparents, or in-laws, is not taxable under Section 56(2)(x). This can be strategically used for investments in the minor’s name.
3. Special Talent Income Management:
   • For children earning independently (e.g., actors or influencers), maintaining proper records of expenses and income ensures smooth tax compliance.
4. Building a Corpus:
   • Investing in equity-linked savings schemes (ELSS) or child insurance plans can help build a significant corpus while saving tax.

Filing Tax Returns for Minors

1. Independent Returns:
   • If a child earns through special skills or has inherited income, they need to file independent income tax returns.
2. Clubbing in Parent’s Return:
   • For other incomes, the parent with the higher income should include the child’s income in their return and claim the exemption under Section 10(32).
3. PAN Card for Minors:
   • A minor earning taxable income independently requires a PAN card for tax filing and compliance.

Investing in the name of a child in India can be an effective tax planning strategy if done thoughtfully. The clubbing of income rules ensures that parents do not misuse a child’s accounts for tax evasion, while special provisions for income earned through talent, disability, and inheritance provide relief and flexibility.

By understanding these regulations, parents can optimize their investments, manage tax liabilities, and secure their child’s financial future effectively. Always consult a qualified tax professional for personalized advice.