In India, a growing number of young individuals—ranging from child actors and young entrepreneurs to social media influencers—are earning significant amounts. This trend has raised important questions about the tax responsibilities for minors. Understanding who is liable for taxes on a minor’s earnings is crucial for guardians and young earners alike. Here’s a comprehensive guide to navigating the taxation framework for minors.
Taxation Framework for Minors
Under the Indian Income Tax Act, minors can indeed have taxable income. However, the responsibility for filing tax returns and paying taxes generally falls on the parents or guardians. This obligation is primarily governed by Section 64(1A) of the Income Tax Act, which stipulates that a minor’s income is to be included with the income of their parents for tax purposes.
Types of Income for Minors:
- Earned Income: This includes income generated from activities such as acting, participating in contests, or any other business ventures. For instance, if a minor wins a prize in a talent show, that prize money is considered earned income.
- Unearned Income: This encompasses gifts, interest from savings accounts, or returns from investments made in the child’s name by the parents or guardians.
According to Kumarmanglam Vijay, Partner at JSA Advocates & Solicitors, “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 added to the income of the higher-earning parent. In cases where parents are divorced, the income is clubbed with the parent who has custody of the minor.”
Exceptions to Clubbing Provisions:
- Manual Work or Skill-Based Income: Income derived from a minor’s manual work or the use of their skills/talents is not subject to clubbing. This means if a minor earns from activities like painting, acting, or other skills-based endeavors, that income is taxed separately.
- Disabled Minors: If a minor has a disability of 40% or more, as defined under Section 80U of the Income Tax Act, their income is taxed independently.
Tax Filing and Representation:
In cases where the income clubbing provisions do not apply, minors can either file their tax returns independently or have their parents or guardians file as ‘representative assessees.’ Independent tax filing by minors requires them to have their own bank accounts, contact details, and login credentials.
Deduction Under Section 10(32)
To alleviate some of the tax burdens on parents, Section 10(32) of the Income Tax Act provides a deduction for the income of minors. This deduction is capped at Rs 1,500 per child or the actual income included, whichever is lower. This provision helps to offset some of the additional tax liabilities that parents might face due to their child’s earnings.
Ritika Nayyar, Partner at Singhania & Co, adds, “The income clubbing provision applies to both stepchildren and adopted children. However, once a child reaches 18 years of age, they are considered an adult, and their income is no longer combined with their parents’ income.”
Taxation on Skill-Based Prize Money:
For minors receiving prize money from skill-based contests, such as quizzes or dance competitions, the income is taxed at a flat rate of 30% plus a 4% health and education cess. Typically, the organizer of the contest will withhold this tax before disbursing the prize money.
Can Minors Get a Tax Refund?
Minors, like any other taxpayers, are eligible for a tax refund if their income tax returns are filed correctly and on time. To qualify for a refund, the tax returns must be filed by July 31 of the relevant Assessment Year, and all necessary criteria must be met.
Conclusion for tax responsibilities for minors
As India sees an increase in young earners, understanding the tax implications of a minor’s income becomes increasingly important. While the responsibility for filing and paying taxes on a minor’s earnings usually falls to the parents or guardians, there are specific provisions and exceptions under the Income Tax Act that can affect this process. By staying informed and ensuring proper compliance, guardians can effectively manage their tax obligations and support their minor’s financial ventures.
