There is a ban on child labor under the Child Labor (Prohibition and Regulation) Act, 1986, applicable for every minor under the age of 18 years. But minors can still earn income from other sources.
Not only salary from employment but minors can also receive an income from bank account savings, fixed deposits, and other investments made by the individual’s parents.
What are the ways a minor can earn?
There are two ways a minor can earn-
- Income through their skills, or special knowledge, or through any curricular activity.
- Through Parents Fixed Deposits, saving accounts in their name.
Do minors need to pay tax?
The Answer to this is YES. Under Section 64 (1A), any minor who receives any amount will be included in their parents’ income, and the tax would be the same as that of their parent’s income.
Individuals who are under the age of 18 are considered Minors. They can have their source of income from various sources like fixed deposits or interests earned from the bank or any investment in their name.
So, if a minor earns less than Rs, one thousand five hundred per month, it won’t be added to the parent’s income, but if their Income extends Rs. One thousand five hundred per month, the parents need to pay tax on the Minor’s Income, which will be treated as parents’ Income.
The above in a nutshell
- Minor’s Income shall be included in their parent’s Income.
- Income of parents whose Income is higher can only be clubbed with the minors.
- Minor child includes stepchild or adopted child too.
- The Income shall not be clubbed if the child is going to be 18 years in the financial year.
- In case the parents’ marriage is not sustained, then the Income of the minor shall be clubbed with the parent who is taking care of the Minor.
- In case no parent is alive, the minor needs to pay tax and file ITR through their legal guardian under the provision of Section 64(1).
Relaxations from clubbing
- Under Section 10(32) of Income Tax, 1961, the relaxation amount of 1,500/- shall be granted to each child (not more than two) to the parent whose income is clubbed with the Minor’s Income.
- If the child is disabled, then the minor’s income shall not be clubbed with that of their parent’s Income under Section 80U for disabilities like mental illness, locomotor disability, blindness, hearing issue, or poor vision.
Tax planning to get exemption from clubbing income-
Parents of minors can adopt this tax planning to avoid clubbing of their Minor’s Income-
- Interest-free Loan- The amount given as a loan by the minor to their loan should be interest-free. The minor should not ask for interest in return, and that is how there would be no proof of Income and hence no question of clubbing.
- Investing in Bonds- Funds earned through minors can be invested in tax-free bonds to avoid the immediate generation of Income through minors.
- Investing in shares- Minors’ income can be invested in equity shares of any private or public company and kept on hold until they get major. (It is recommended to study the market before funding for a long-term loss).
- Partner in any family business- One can make their minor their family firm partner for investing their funds. The family member should not provide any interest in the capital until the minor becomes major. Any share of Income received through the capital of the minor should be exempted under u/s 10(32) of the Income Tax Act, 1961.
- Investing in PPF Account/ Sukanya Smiridhi Scheme (for girl child)- The Funds of the minor can be invested in these as the interest earned from these schemes are not tax payable.
- Investing in Land/Property- One can invest their Minor’s Income, and there comes no question of clubbing. And hence the land can be sold after the minor becomes major.
Any individual under the age of 18 is known to be a minor, and if the Minor earns any income, then their income will be clubbed with that of their parents, and that’s how their tax is calculated.
- How do I show minor Income in ITR?
The Income of the minor shall be clubbed with their parent’s Income and whose Income is more significant. Then the Income will be shown under the head ‘ Income from other sources and exempted Income shall be established under exempted Income.
- Who is a minor as per Income Tax Act?
Any individual under the age of 18 shall be considered as Minor, their Income shall be clubbed with their parents under Section 64(1A), and the tax will be calculated.
- How much can Minor make tax-free?
Until further notice, any minor earning up to $12,200 can earn without paying tax.