With sense of responsibility, love and for the safe future of the child, parents do make investment in the name of their minor. Not only a sign of genuine emotional expression, it is also a tool of tax planning. However, clubbing provision in section 64(1A) of the Income Tax Act -1961 requires income of the minor to be clubbed with the income of the parents for levy of income tax. The idea behind clubbing provision is to control the tax avoidance by spreading investment in different names. There are lot of confusions and misconceptions about the clubbing provisions. Let us have a look at some of the key issues involved:

1.      Not all income are subject to the clubbing provision:
Clubbing provision is not applicable if the minor has earned an income because of own manual work, or out of talents or specialized knowledge & experience. Thus, if a minor, of say 15 years, have earned income from development of android app or from e-commerce, or from singing, dancing etc. then the income would be treated as his/her individual income. Further, clubbing provision is not applicable in case of a minor who is disabled (based on definition of disability in Section 80U). Whenever minor child’s income is clubbed, exemption up to Rs 1,500/- for maximum of 2 child is available to the parents.

2.      Clubbing provision applicable even if the fund of minor is not provided by Parents:
Clubbing provision is applicable for all the income of the minor and it is not restricted to the income out of the funds given by parents alone.

3.      Clubbing in the hands of Mother or Father?
Minor’s income is required to be clubbed with the income of the parents. It is to be clubbed in the hands of the parent whose total income is higher. Once included in the hands of any one parents, it will continues to be clubbed with the income of the same parents in subsequent years. For example, in the first year of clubbing, income of mother was higher and so income was clubbed with the income of the mother. In subsequent years, even if the income of the mother is less than the income of the father, then also the clubbing provision would be applicable in the hands of the mother.

4.      Clubbing provision if Minor becomes major during any particular year:
Clubbing provision would be operative so long as the child is a minor. If the child attains majority at any time during the financial year, then all subsequent income would be treated his/her individual income and would be outside the net of clubbing provision. However, income earned till minority will be subject to the clubbing provision.

5.      Clubbing provision vis a vis (a) Capital gain and exemption thereto (b) LTCG above Rs. 1 Lakh from shares taxable u/s 112A (c) Dividend income exceeding Rs. 10 Lakh:
Computation of minor’s income has to be done independently in the hands of the minor and then only the clubbing provision would apply in the hands of the parents. Resultantly, in all three situations elaborate above, income after exemption would be subject to the clubbing provision. For the same reason, restrictions of owning not more than one house by the owner u/s 54F, limit of Rs. 50 Lakh p.a. per person etc would be considered independently in the hands of the minor. In short, benefit of computation cannot be lost on applicability of clubbing provision. Same conclusions can be arrived at from the judgement of CIT V. Lalji Agrawal (1998) 234 ITR 820 (All).

6.      Divorce:
If the parents are divorced, income is required to it is clubbed with the income of the parent who is maintaining the child.

7.      Applicability of Clubbing provision in the hands of Guardian if parents not alive:
Section 64 envisages clubbing of income with the income of the parents and not with any other persons. If the parents are not alive then it is not taxable in the hands of the guardian be it grandparents, uncle etc. Same views were affirmed in R. P. Sarathy v. CIT (2006) 5 SOT 732 (Chennai).

8.      Clubbing to apply after deduction or before deduction towards LIC, PPF, etc (i.e., Chapter VIA deduction) :
Clubbing provision is applicable to “income” and “income” is income before allowing deduction under Chapter VI-A. [ITO v Kuldeep Jain (2002) 81 ITD 379 (Delhi ITAT)]

9.      Clubbing provision is applicable to loss also:
Income include loss also and so if minor have incurred the loss then such loss will also be subject to the clubbing provision and will be treated as the loss of the parents.

10. Agricultural income of the Minor:
Agricultural income, though exempt from tax, is required to be considered for rate purpose. If minor have agricultural income then will it be aggregated in the hands of the parents for rate purpose? MP High court in Suresh Chand Talera V Union of India (2006) 208 ITR 341 has held that it is required to be aggregated in the hands of the parents for rate purpose. [Contrary view has been express in the case of Babita P.Kanungo V DCIT (2005) 277 ITR (AT) 177 (Mum). In my view, MP courts view appears more appropriate].

Tax Planning Tips:

Minor’s funds should be invested in such a way that it either yield tax free income or yield income after attaining becoming major like investment in Agricultural land, shares for long term holding,

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