How to protect against clubbing of minor’s income?

As a general rule an assessee is taxed for his own income. But under certain exceptional circumstances this rule is not applicable.  An assessee is also taxed for the income which belongs to someone else.

In the earlier times the taxpayers tried to reduce their tax burden by transferring their assets to their family members or relatives so that the tax burden shifts to others but the benefits of income are obtained by them.

“Clubbing of income”:

In order to check such practices of tax avoidance, some provisions have been made in sections 60 to 64 of the Income Tax Act.  According to those provisions, a person is liable to pay tax on his own income and for the income belonging to others depending upon certain conditions. This inclusion of the incomes of someone else in the income of the assessee is known as “Clubbing of Income” and the income is known as “Deemed Income”.

“Clubbing of minor’s income”:

The income of a child is added to the income of parent having higher income till the child reaches majority that is 18 yrs. But one can claim deduction up to Rs. 1,500/- from the income of his minor child.

A minor’s income is clubbed irrespective of the residential status of the child and his parents. The provisions are applicable even if the parents are NRI and the minor resides in India or if the minor is NRI and his parents reside in India.
If you have a recurring or fixed deposit in a bank or post office in your minor child’s name, then the interest on such deposit will be added to your income and you shall be taxed accordingly. You have to pay tax on your child’s income in your income tax return. If your child is earning out of his or her own capacity, then he or she has the liberty to file his or her own return.  In such a condition, clubbing of income rules will not be applicable.

However a minor’s income is not clubbed if the minor is having permanent physical disability.

How to avoid clubbing of minor’s income?

One can protect against clubbing of minor’s income with that of his parent by investing in tax free instruments like PPF, MF, etc.

Gold is an asset in which you can invest since it does not invite any tax for holding gold. Gold can be kept as a security for emergency funds and urgent family requirements.

To purchase a house, you can mortgage the gold you have purchased and take loan. The Interest paid towards repayment of loan can be claimed as deduction from one’s income. This is more useful than a house which is difficult to mortgage. As such, one can reduce his tax liability by buying gold as compared to tax free instruments in his minor child’s name.