India is increasingly seeing a surge in young entrepreneurs, child actors, and social media influencers, many of whom are under the age of 18. This trend has brought attention to an often-overlooked aspect of taxation: Who is responsible for paying income tax on earnings of children? As the landscape of youth employment evolves, it is crucial for guardians and young earners to understand the intricacies of India’s tax laws concerning minors.
Taxation framework for minors
Under the Indian Income Tax Act, any income earned by minors is taxable, but the obligation to file and pay taxes generally lies with the parents or guardians. This is mainly governed by Section 64(1A) of the Income Tax Act, which requires that a minor’s income be combined with their parents’ income.
Income types and tax implications
Minors can earn two types of income: earned income and unearned income.
Earned income: This includes money earned from activities such as participating in contests, acting, or any business ventures. For example, if a child wins a talent show and receives a cash prize, this income is considered earned.
Unearned income: This encompasses gifts, interest from savings accounts, or income generated from investments made in the child’s name by parents or guardians.
Kumarmanglam Vijay, Partner at JSA Advocates & Solicitors said, “Income earned by minors under the age of 18 is clubbed with their parents’ income and taxed accordingly. If both parents are earning, the minor’s income is clubbed with the higher earning parent. In case of divorced parents, the income is clubbed with the parent who has the minor’s custody. However, the clubbing provisions do not apply if the minor’s income accrues or arises from manual work, use of skills/talent, or if the minor is disabled. In cases, where clubbing of income is not applicable, minors can file their own tax returns or parents/guardians can do so as ‘representative assessees’ by providing necessary credentials. Independent filing of income tax returns by the minor requires providing their own banking, contact and login details.
Deduction Under Section 10(32)
To provide some relief to parents, the Income Tax Act allows a deduction under Section 10(32). This deduction is limited to Rs 1,500 per child or the actual income included, whichever is less. This provision helps offset some of the additional tax burden on parents.
“The income clubbing provision applies equally to stepchildren and adopted children. However, once a child turns 18, they are considered an adult, and their income is no longer combined with their parents,” said Ritika Nayyar, Partner, Singhania & Co.
“If they have a disability exceeding 40 per cent (as specified under section 80U of the IT Act), their income is taxed separately. There may be cases where a minor wins prize money from skill-based contests, quiz competitions, dance contests etc. In such cases their winnings are taxed at a flat 30 per cent plus a 4 per cent health and education cess. The organiser typically withholds this tax before disbursing the prize.” he said.
Can a minor get a refund on Income Taxes?
According to the Income Tax Act, to qualify for an income tax refund, taxpayers must file their return by July 31 of the relevant Assessment Year. Minors, like any other Indian taxpayer, can receive their tax refund on time if the Income Tax returns are filed in their name and all necessary criteria are met.
First Published: Jul 19 2024 | 6:41 PM IST
