The provisions relating to the clubbing of income of a minor child with the income of the parent or the grand-parent, as the case may be, have undergone a great deal of change due after the amendments made to Section 64, by the Finance Act, 1992, with effect from the Assessment Year 1993-94. Under the provisions of Section 64 (IA) as inserted by the Finance Act, 1992, with effect from the Assessment Year 1993-94 in computing the total income of any individual, whether a resident or a non-resident, the entire income accruing to his minor child would be clubbed i.e., included in that income. Thus the income of the minor child from gifts made by any one and not necessarily the parents or grand-parents only, by way of interest income or rental income, etc., on investments made out of the funds of the minor child would be clubbed with the income of the parent.
However, the clubbing provision would not apply if the income of the minor child accrues or arises on account of any
(a) manual work done by him; or
(b) activity involving application of his skill, talent, or specialised knowledge and experience.
Thus if a grown up child aged, say 14 or 15, earns some income out of the exercise of his special talent in computer science, games, sports, shorthand, etc., the income so derived by the minor would not be clubbed with the income of his or her parent.
The Finance Act, 1994 had, with effect from the Assessment Year 1995-96, provided that the clubbing provisions of Section 64(IA) would not apply in the case of a disabled child suffering from any disability of the nature mentioned in Section 80-U.
The question may be asked to the particular parent with whose income the income of the minor has to be included. For this purpose, it is provided that where the marriage of the parents of a minor child subsists, then the clubbing has to be done with the income of that parent whose total income, excluding the income under Section 64(1A), is greater. Where, however, the marriage of the parents does not subsist, then the clubbing has to be done with the income of that parent who maintains the minor child in that previous year. Further, while any such income is once included in the total income of her one parent, any such income arising in any succeeding year would not be included in the total income of the other parent, unless the Assessing Officer is satisfied, after giving that parent an opportunity of being heard, that it is necessary to do so.
Under the provisions of Section -10(32) of the Income Tax Act complete exemption is enjoyed by the parent in respect of the income of the minor child so included to the extent of `. 1,500 for each minor child.
A minor can, however, now be admitted to the benefits of partnership in a partnership firm even where his father or mother is a partner, without invoking the clubbing provisions of Section 64. Thus, with effect from the Assessment Year 1993-94 the share income of a minor child on his being admitted to the benefits of the partnership will not be clubbed with the income of the father or the mother but would be completely exempt from income tax under provisions of Section I 0(2A). Hence proper tax planning can be adopted in respect of the funds of the minor child so as to prevent the clubbing of the income of the minor child with that of his parent by admitting the minor child, wherever it is possible, in a partnership firm. In such a case the entire share income received by the minor would be completely exempt from income tax and there would not be any scope of clubbing such share income with that of the parent. Likewise, if the minor has any income which is completely exempt from income tax under the provisions of Section 10, like interest on deposits in PPF account, etc., the clubbing provisions of Section 64(IA) are not applicable simply because such income is fully exempt from income tax.