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Avoid clubbing of minor child income



Most of the taxpayer invests in the name of their child and enjoy the deduction in the year of investment but as they are not well converse with the clubbing provisions, their tax liability increases when the income is earned on the said investment. Tax paid on the clubbed income cost more to taxpayer then the deductions enjoyed. Every taxpayer should invest in the name of their child by proper tax planning in order to avoid clubbing of income.

But the Income Tax Act itself provides remedies to avoid the clubbing of any income arising to a minor child. At the very outset, the Act specifies that the income of each minor child upto Rs.1500, from any source is not to be clubbed with the parent’s income. Thus if a person has two children then a total of Rs.3000 would not be taxed in the hands of either of the parents.

Moreover, the funds of a minor child can be invested in a partnership firm towards contribution of capital and the “shares of profit from the firm” that the minor child shall receive will not be clubbed in the hands of father / mother as it has been clearly provided in the Income Tax Act that “the share of profit received from the partnership firm is exempt from tax in the hands of partner”, so neither the minor child nor his parents will be liable to tax on the same.

Similarly, if the minor child becomes the owner of an industrial unit in any specified areas notified by Government then any income arising therefrom will neither be taxed nor will be clubbed as per Section 10, which provides exemption to “income from newly established industrial undertakings”.

In addition to this, the most beneficial alternative would be investment in PPF (Public Provident Fund) Account in the name of minor child. Section 80C provides deduction for amount invested in PPF account, either in the assessee’s name or in the name of spouse or minor child, every year, to the extent of Rs.100000.  Since the interest from PPF is completely tax exempt, it would not be subject to clubbing provisions. It is also advisable to invest funds of the minor in a mutual fund as the dividend income from mutual funds is tax – exempt.

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About: 

Alok Patnia founded Taxmantra.com, an expert in tax advisory & compliance. He is a Chartered Accountant having prior exposure with Ernst & Young & KPMG.

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