Introduction:
There may be instances where a person may be required to file income of another person with his own. Clubbing of Income means adding the income of another person to one’s own income and then filing the return for it. A person may transfer his income to another person to avoid his tax liability or reduce his tax burden. The objective of this provision is to check tax avoidance. In this article, we will discuss the provisions, exceptions, permissible deductions, and significance of clubbing of income of the minor child. Here, the minor child will include an adopted child, a stepchild, and a minor married daughter.
Applicability of Clubbing of Income of Minor:
Section 64 (1A) of the Income Tax Act, 1961, governs the provisions dealing with the clubbing of income of a minor child. Clubbing of Income of a minor child means clubbing the income of the minor to that of his parents. All the income of the minor is to be clubbed or added to the income of his parents in the calculation of Income Tax. The income of the minor is to be added to the income of that parent whose income is more without adding the income of the minor child.
However, if the marriage of the parents doesn’t continue, then the income of the minor child will be clubbed with the income of that parent who maintained the child in the previous year. Once the income of a minor child is clubbed with a parent, the income shall continue to be clubbed with the income of that parent only. Unless the Assessing Officer, after giving an opportunity of hearing to the other parent believes it’s necessary to change.
Exceptions to the Clubbing of Income of Minor:
All the income of the minor will be clubbed to the income of the parent for Income Tax Return except:
- Any income earned by a minor child on account of any manual work,
- Any income earned by a minor child on account of his skill, experience, talent, or special knowledge,
- Any income earned by a minor child on account of suffering any disability mentioned under section 80CU.
They will not be clubbed in the income of the parent. Instead, they will be taxed in the hands of the minor child. The return of Income shall be filed by the parent/legal guardian on behalf of the minor child.
Also, if both the parents of the child are not alive, then also there will be no clubbing of income. Instead, a separate return of tax will be filed by the legal guardian on behalf of the minor child.
Allowable Deductions from Taxable Income of Parent:
If the income of the minor child is clubbed in the hands of the parents, then there will be a deduction of Rs. 1,500 per annum per child available to the parent (whose income was clubbed with that of the minor) to his taxable income. However, if the income of the child is less than or equal to Rs. 1,500, then the whole of the income is exempted.
Tax Implications of Clubbing of Income of Minor:
The normal tax rate slabs shall be applicable on the income of the minor child which has been clubbed with that of his parent. This is so because this income is treated as the income of the parent. Thus shall be considered part of the parent’s taxable income and shall be liable to tax as such.
Conclusion:
The objective of the provision of clubbing of income of a minor child was to check on avoidance of tax. It was a common practice where a person transfers his own income in the name of his minor child. And then he avails himself of the benefits of a lower tax rate due to lower overall income. The concept of avoidance of clubbing of income of a minor should be understood very clearly. So that one can know the circumstances when clubbing of income of a minor child will be applicable.
