When are minors eligible to pay tax

Taxation is a complex subject, and its nuances are hard to grasp for the common man. The wide range of taxation laws, and their frequent chopping and changing, means that tax payers are never entirely sure what their tax liabilities are.

Taxation for minor children is one such confusing subject. In a connected world that offers great premium to the skillsets and knowledge of millennials, it’s common to see kids starting to earn at a young age. Not just that, there’s a plethora of reality television shows and contests of various kinds which attract children and offer handsome rewards. Minors may also make an earning through investments made in their name by their parents.

Here is a closer look at earnings made by minors and when they become liable for taxation, as well as ways in which you as a parent can file taxation on behalf of your children.

Let’s take a deeper look at how tax laws impact such earnings.

Understanding the linkage between minors and income When it comes to taxation, any individual below 18 years of age comes under the bracket of a minor. The exact nature of the minor’s income is the determining factor as to how income-tax will calculated on it.

If the minor is earning income from investments like bank accounts, fixed deposits, and other investment options made by parents, the income generated thus is clubbed with the income of the parent.

Therefore, if you had plans to save on income-tax by investing in your child's name, know that the income in the name of your minor child eventually will be clubbed on to your income.

Minor income and clubbing with parents A common concern among parents is which parent’s income will absorb the brunt of tax on the clubbed income if both parents are working. The clubbing of a minor’s income to that of the parent is done as per Section 64(1A) of the IT Act. The Act states that the income of the minor will get clubbed to the income of the parent whose income is greater.

If the parents of the minor child are no longer living together and are legally separated, then the parent maintaining the child will have their income clubbed with that of the child.

Tax deductions permissible as a parent When you club your child’s income to your income, you can claim a tax exemption of Rs 1,500 for each minor child provided the income of the child exceeds Rs 1,500 for the year. If the income is lower than the threshold of Rs 1,500, you can claim a tax deduction for the full amount.

Exception allowed for minor income Here are a couple of exceptions where the money earned by your minor child will not get clubbed to your income as a parent and will be considered as his or her own income.

If your child is suffering from any disability as specified under Section 80U, then the income earned by the minor will not be clubbed with your income and will be taxable as his or her own income.

If your child earns any income using his special skill set or talent and knowledge like participation in talent competitions, sports, academics etc., then also the income earned by the minor will not be clubbed with the income of either of the parent. Such income will be taxable if it crosses the exemption limits of the financial year that is Rs 2,50,000 currently.

Any individual, including minors, who has earns income in the financial year is liable for income-tax. The exact nature of tax and deductions on offer depend on the type and quantum of earnings made by the minor in the assessment year.