Children’s income and income tax

K. ARAVIND

Many parents invest in mutual funds, PPFs and bank fixed deposits in the name of minors. The tax liability is to be calculated by adding the interest, dividends and capital gains received from such investments to the parent’s income.

But just because an investment is made in the name of the child does not mean that the parent is liable for the tax. In addition, if the investment is made in tax saving schemes in the name of the child, the parent will get a tax deduction in its name.

Under Section 80C of the Income Tax Act, if an investment is made in the name of an equity linked savings scheme or PPF in the name of a child, the parent can claim the tax deduction in its name. Such investments are tax deductible after deducting the parent’s taxable income. Under Section 80C, a tax deduction can be claimed for an investment of up to Rs.1.5 lakhs.

Deposits in the name of children can also claim another type of tax deduction. If the parent has made a taxable investment in the name of the child, the interest on the deposit in the name of the child up to Rs. 1,500 / – will be tax deductible. This tax exemption is as per Section 10 (32) of the Income Tax Act.
For example, if an investment in the name of the child yields Rs.5,000 as interest, Rs. 1,500 can be tax exempted and the remaining Rs 3,500 should be added to the taxable income. If both the parents have taxable income then the interest on the investment in the name of the children should be added in the name of the highest income earner.

Children’s own income does not have to be added to the parent’s taxable income. Children earn income through TV, movies, sports and other arts activities. Income earned by children in this way using their own ability or knowledge should not be included in the parental taxable income. Similarly, the income of children with certain disabilities does not have to be added to the taxable income of the parents.

Interest or capital gains on investments in tax saving schemes such as PPF in the name of children are not taxable. Benefit from PPF is tax free. At the same time, interest on bank fixed deposits is taxable. When the child reaches the age of 18, the child’s income does not have to be added to the parent’s taxable income. The tax liability of a person who has attained the age of 18 years will be considered separately.