Sujit and Shobha have two minor children and, yet their minor children’s income is not being clubbed with their individual incomes. No one would be convinced because everyone is aware of the problems created by Section 64(1A) of the Income Tax Act, 1961, which provides for clubbing the income of minor children in the total income of the father or mother.
Let us go through the provisions of the Income Tax Act to this effect and arrive at the conclusions and systematic aspects of tax planning, within the framework of Income Tax law.
Section 64 contains the various situations under which income of an individual is to include the income of the spouse, as also that of a minor child. Sub-Section (1A) of the said Section 64 more specifically mentions that, “. . in computing the total income of any individual, there shall be included all such income as arises or accrues to his minor child, not being a minor child suffering from any disability of the nature specified in Section 80U of the Income Tax Act, 1961.”
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In addition to the above clear-cut provisions there is also a proviso attached to this Section stating, that nothing contained in this sub-section shall apply in respect of income as arises or accrues to the minor child on account of any (a) manual work done by him, or (b) activity involving application of skill, talent or specialised knowledge and experience.
Let us now see how it is possible for the income arising to a minor child to not be added or clubbed with the income of the child’s father or the mother. One small point to be noted is, that the income of the minor child is to be clubbed with the income of the father or the mother, whoever has the higher income.
The first simple tip is that the income of each minor child upto ` 1,500, from any source, is not to be clubbed with the parents’ income as per Section 10(32) of the LT. Act. Thus, if a person has two children, then income arising to them upto the maximum extent of ` 1,500 per child, i.e., total of ` 3,000 would not be clubbed or added to the income of the father/mother.
If funds of the minor child are invested in a partnership firm towards contribution of capital and the minor child receives “share of profit from the partnership firm,” then the amount received by the minor child from his partnership firm would not be included in the total income of the father/mother and thus the clubbing provisions would not cause any problem at all. This is because, as per Section 10(2A) of the Income Tax Act, the share of profit received by a partner of a partnership firm, is not liable to income tax and this would hold good even for the minor child. However, no interest on capital should be paid on the capital of the minor child, otherwise such interest would be clubbed in the income of the father/mother.
Similarly, if the minor child becomes the owner of an industrial unit in select notified areas and states of India like Himachal Pradesh, Goa, etc., the income therefrom would be exempt and not clubbed, because the incomes of such newly established industrial undertakings are exempt under Section 10 of the Income Tax Act.
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