The first point that should be remembered by a taxpayer is that the provision regarding clubbing would be operative only so long as the child is a minor. If the child attains majority at any time during the financial year, then he should be considered a major. The age of majority is eighteen plus, i.e., with the completion of 18 years of age. Hence, during any financial year, if the minor completes the age of 18, then the provisions for clubbing would not apply in his case and he would be assessable independently. These provisions do not operate in the case of a minor suffering from any disability, like blindness, etc. as is specified in Section 80U.
Where, however, a minor continues as a minor, there is one small exception about the clubbing of income, that income upto ` 1,500 p.a. per minor child is exempt and is not includible in the income of the parent as per the provisions of Section 10(32) of the IT Act.
Thus, the minimum exempted income, even in respect of amounts transferred by the father or mother or grandmother or grandfather or any other person, is enjoyable independently as tax- free income in the hands of the minor child upto `1,500 per such child, upto a maximum of two minor children.
Another important exception where the income of the minor child is not includible with the parent is as per the proviso to Section 64(1A) which provides that it is so where any income accrues to the minor child on account of:
(a) manual work done by him; or
(b) activity involving applicable of his skill, talent or specialised knowledge and experience.
Thus, where a minor, say aged 14 and having specialised knowledge of computers, internet, c-commerce, accountancy, etc. derives income by way of salary or otherwise. due to his specialised knowledge and experience or the application of his skill or talent, then such income would be considered as income belonging to the minor only. Such income would not be added to or clubbed with the income of the parent.
Where a minor does not have any such income by skill, talent, specialised knowledge, experience or manual work, and still the minor has a good deal of funds, then any of the following aspects of tax planning can be adopted by the parent of the minor so that there is no clubbing of the minor’s income with the income of the parents:
(a) The minor can be made a partner in a family firm. In such a case, no interest should be given to the minor on his capital. The share of income received by a minor from the partnership firm would be completely exempt from income tax under Section l0(2A) of the IT Act and thus would not be includible in the hands of the parent.
(b) No interest on loan should be given to the minor by the parent or the family concern or some other relative. Thus the risk of clubbing of interest could be avoided. This is based on the principle that “Income which could have been earned but which in fact has not been earned is not taxable income”.
(c) An investment upto `1,00,000 per year (together with parent’s deposit in PPF which is the maximum permissible amount for deposit in a public provident fund account can be made in the name of the minor out of his funds so as to enable him to earn 8.6% tax-free interest every year. The maximum amount which can be deposited in PPF A/c is `1,00,000 which would also be entitled to tax deduction under Section 80C. Nowadays the maximum amount of deposit in the PPF account in the name of the minor child is inclusive of deposit in the name of the parent of such minor child.
(d) Investment of a minor’s funds can be made in good new company shares or in the primary market or some other equity shares in the secondary market without affecting the tax liability of the minor or the guardian because after a period of 12 months, no fax would be payable on the long-term capital gains, especially in the case of listed securities.
(e) Where the funds of the minor are not required till he attains maturity, they can be invested in agricultural land or nonagricultural urban land so as to have good appreciation of funds so invested.
(f) A part of the funds of the minor could be invested in such schemes floated from time to time as those which result in accumulation of income and which allows the minor the right to withdraw the entire amount only after he attains majority so that the income is not taxable or clubbable during the period of minority.
(g) Investment in New Tax Free Bonds issued from time to time.
It may be mentioned here that as per the General Clauses Act, “he” includes “she” and the singular includes the plural. For example, “parent” includes “parents” unless otherwise so stated, throughout the book.
Presently the maximum exemption limit for individual is `2,00,000 for the financial year 2012-2013. Thus, if a minor child derives any income during the financial year 2012-2013 out of his skill or talent and such income happens to be upto `2,00,000 then no tax is payable by the minor child. Likewise, if during the same period a girl child derives income from her skills and talent upto `2,00,000, then she pays no income tax at all.