Tax on income from gifts to minors

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Until a few days ago, Badri was very happy. The reason for his happiness was that his child’s future was secure. He owned a property which he gifted to his 12-year-old son. He got three benefits from this. First, his monthly income is now fixed because the property has been given on rent. The child’s future is secured and if the rental income is not added to his income, then he will not have to pay much tax.

But Badri’s happiness did not last long. One of his acquaintances told him that although the child’s future has been secured, he will have to pay tax. But why will tax be paid by Badri despite gifting the property? This was beyond his understanding. Let’s find out why this would happen?

Under the Income -Tax Act, 1961, tax has to be paid if a gift of more than Rs 50 thousand is received in a financial year and the tax has to be paid by the person receiving the gift. However, under the Income-Tax Act, there is no tax on gifts of any value received from people who fall within the definition of ‘relative’.

The definition of relative includes spouse, brother or sister, mother or father, spouse’s parents. Badri has gifted the property to his son. In such a situation, there will be no tax liability on both of them while gifting the property.

Now comes the question of when and why Badri will have to pay tax on the gift given to his son. Generally, a person is taxed only when he earns money on his own. But in some special cases, when someone else earns, that income is also added to your income. In such a case, where the income of another person gets added to your income, it is called clubbing of income or income clubbing. Provisions related to clubbing are given in sections 60 to 64 of the Income-Tax Act.

Section 64 talks about when and how the earnings of a spouse or a minor child i.e. a child below 18 years of age are added to your income. Section 64(1A) covers earnings of a minor child. This also includes step and adopted children.

Under Section 64 (1A), if a minor child has any earnings, then it is added to the earnings of his parents, whichever of the parents i.e. mother or father has higher earnings. The child’s earnings will be added to his income. If the parents get divorced, then the child’s income will be clubbed with the person who is his legal guardian.

Clubbing of income will remain applicable till the child attains adulthood. After attaining adulthood, this income will be taxable in his own hands. There are three such situations under the Income Tax Act, when the income of the minor child is not added to the income of the mother or father.

First, the income of the child suffering from disability mentioned in section 80U will not be added to the income of the mother or father. Second, if the child earns by doing any manual work, then such income will also not be added to the income of the parents. Third, if your child participates in any game show or activity and earns any income from his skill or talent, then this earning will also not be added to the income of the parents.

Like Badri, if you also buy a property or get an FD made in the name of your minor child or wife with the intention of hiding your income, with the thought that you will not have to pay any tax on the returns you get from it, then keep in mind the provision of clubbing. You may have to pay tax on such income. Keep one more thing in mind,  if you save tax this way, then it can be considered tax evasion and you may have to pay penalty.