Rules of Income Tax for Minors – Just Easy Guide for Parents

Nowadays, the kids are making heights in terms of earning through numerous sources-from talent shows to showcasing themselves on various social sites like YouTube and Instagram. As this income increases, the question arises for many parents- whether children pay tax on their income? Fortunately, specific rules about income tax on minors exist, and this article discusses all that you need to know.

Understanding Earned vs. Unearned Income

Before diving into tax laws, it’s important to understand the two types of income a minor may have:

Earned Income: This includes money that a child earns directly from their own efforts, such as through competitions, social media platforms, or any other active source of income.

Unearned Income: This type of income is money that the child receives without actively earning it. For example, if a child inherits property or receives a gift, it counts as unearned income. Also, income generated from investments made in the child’s name, such as interest, is considered unearned income.

Income Tax Rules for Minors

According to Section 64 (1A) of the Income Tax Act, if a minor earns income, they do not have to pay taxes directly. Instead, the income is added to the parent’s income, and the parents are responsible for paying the tax based on the combined total income.

Key Tax Exemptions for Children

Tax-Free Income: Under Section 10(32) of the Income Tax Act, any income up to Rs 1,500 earned by a child is tax-free. If the income exceeds this amount, it will be added to the parent’s income for tax purposes.

Tax Calculation for Both Parents: If both parents earn, the child’s income will be added to the higher-income parent’s total. The tax is then calculated on the combined income.

What Will Happen When a Minor Wins a Lottery?

In a situation where a minor wins the lottery or any prize equal to it, 30% TDS will be deducted right from the prize money. Moreover, there will be an additional 10% surcharge on the TDS along with 4% cess.

What Happens If the Parents Are Divorced?

In case the parents get divorced, the income of the child will be clubbed with the income of the legal guardian parent. If orphaned, the underage would be required to furnish a return on his/her own.

Income Tax Exemption on Disabled Children

For the child who is handicapped or disabled above 40%, as per section 80U, the income would not be clubbed along with his/her parents’ incomes. In that case, he/she will file the Income Tax Return and take care of his/her tax-related matters.

As a parent, it’s important to stay informed about the tax rules regarding your child’s earnings. While children under 18 don’t pay taxes directly on their earned income, the responsibility falls on parents. Understanding the rules around earned vs. unearned income and the exemptions available can help you navigate your child’s income tax obligations smoothly.

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