Clubbing of a minor child's income with the parent's income

The statement

As a rule, a person pays tax only on his own income. The Act departs from this rule where income is shifted to members of the family to split one income into several smaller incomes, each taxed at a lower slab. In such cases the income of another person is included (clubbed) in the assessee's total income and taxed in his hands. The statement is therefore correct: an assessee's liability can extend to income that legally belongs to someone else. The provisions cover income of the spouse, of the son's wife, of a minor child and from assets transferred without adequate consideration (Income-tax Act, 2025, sections 96 to 99). The best-known case is a minor child's income.

Income of a minor child (section 99(1)(c), formerly section 64(1A))

All income arising or accruing, directly or indirectly, to a minor child is included in the total income of the parent. It does not matter whether the income comes from assets gifted by the parent, by a relative or by anyone else, or from the child's own savings. Income includes a loss (section 99(5)(d)), so a loss of the minor is also clubbed.

Exceptions

The following income of a minor child is not clubbed (section 99(1)(c)):

1. income from work done by the child, such as wages for manual work;
2. income from an activity in which the child applies his skill, talent, specialised knowledge or experience, such as prize money from a chess tournament or fees for acting in a film; and
3. any income of a minor child suffering from a disability of the nature specified in section 154 (formerly section 80U).

Income earned by investing such exempt earnings (interest on a deposit made out of a child artist's fees, for example) is income from an asset, not from the child's skill, so it is clubbed. A child with the disability in point 3 stands apart: none of that child's income is clubbed, investment income included.

In whose hands it is included (section 99(5)(b))

• If the marriage of the parents subsists, the income is included in the income of the parent whose total income, before this inclusion, is greater.
• If the marriage does not subsist, it is included in the income of the parent who maintains the child in the tax year.
• Once included in one parent's income, it is not shifted to the other parent in a later year unless the Assessing Officer, after giving the other parent an opportunity of being heard, is satisfied that it should be (section 99(5)(b)).

Exclusion of ₹1,500 a child (Schedule III, Sl. No. 17, formerly section 10(32))

The parent in whose income a minor's income is clubbed may exclude up to ₹1,500 for each such minor child. If the child's income is less than ₹1,500, only that income is excluded. This exclusion is available under the optional (old) regime only; under the default regime of section 202(1) it is not allowed (section 202(2)(a)(i)).

Illustration (our own)

Mr. Arora's total income is ₹14,00,000 and his wife's is ₹9,00,000. Their 12-year-old daughter earns ₹26,000 of interest on a fixed deposit gifted by her grandmother and ₹40,000 as prize money in a national quiz. The quiz prize comes from her skill and is not clubbed. The interest is clubbed in Mr. Arora's income, as his income is greater. If he has opted out of the default regime, ₹26,000 − ₹1,500 = ₹24,500 is added to his total income; under the default regime the whole ₹26,000 is added.

Conclusion

Through the clubbing provisions, especially the rule for a minor child's income, a parent can be taxed on income that legally belongs to the child. This prevents the splitting of family income to escape higher slab rates, while the exceptions protect income the child earns by his own work or talent.