Income Tax for minors

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Niraj Kumar (Querist)
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12 October 2009 My cousin (14 yr. old) earns Rs. 2 lacs per year from bank interest. The bank deducts a huge amount as TDS. Since her parents are dead, can she file Income Tax Return on her own? or her income needs to be clubbed with her guardian.

CA Akshat

CA Akshat (Expert)
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12 October 2009 minor's income will be clubbed with guardian's income if the parents are dead. As per section 64 the income of minor (except is earned by its skill) will be clubbed with income of the guardian. If the parents are the gardian then the income will be clubbed whose income before adding minor's income is greater. But if the child is not with parents then the income will be added with guardian.

Rajeev

Rajeev (Expert)
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12 October 2009 Any income on investments made in the name of a minor do get clubbed with the adult's income. According to Section 64 of the Income Tax Act (1961), the income of a minor child, from investments, could be included with the income of the father, mother or guardian, as the case may be. If you set up a trust in the minor's name, the investment in his name will not be included in guardian's income. But the income cannot be tapped while the child is still a minor. In a landmark judgement, the Orissa High Court (in the case of the Commissioner of Income Tax vs. Shri Abhayananda Rath Family Benefit Trust) deferred benefits during the period when the child was still a minor from a trust. The trust money can therefore be given to the person on adulthood and that monetary benefit may not be included in the total income of the parent or guardian. This ensures that the immediate or deferred benefit of a trust is for the benefit of the minor.

Since your cousin is 14 years old , you can try and save tax as per mentioned above after due advise from a professional and use that money (& interest on that money) for her education etc

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Niraj Kumar

Niraj Kumar (Querist)
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13 October 2009 Thanks Akshat & Rajeev for the replies.

@ Rajeev
I agree with the idea of setting up a trust in the name of the minor. But the key issue in my case is the TDS is already deducted by the bank, so I need to file the return to get back the tax.

So, can I set up the trust in the name of the minor and file return for the interest earned (the interest earned is under Fixed Deposit for long term, hence the money will be withdrawn only on maturity of the F.D. which is only after my cousin turns 18).

Asha Kanta Sharma

Asha Kanta Sharma

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31 July 2024 In your cousin's case, there are specific provisions under the Income Tax Act, 1961, regarding the taxation of minors' income and the filing of income tax returns. Here's how the situation can be handled:

### Filing Income Tax Return for a Minor:

1. **Clubbed Income**:
- Under Section 64(1A) of the Income Tax Act, a minor's income is generally clubbed with the income of the parent whose total income is higher, unless the income arises due to the minor's own skill, talent, or specialized knowledge and experience.
- However, in your cousin's case, since both parents are deceased, this provision of clubbing with a parent does not apply.

2. **Guardian Filing Return**:
- The minor's income will need to be reported by a guardian. Since the minor cannot file the return on their own, the guardian or trustee will be responsible for filing the income tax return on behalf of the minor.
- The guardian can file the return in the minor's name and PAN to claim the TDS refund.

### Setting up a Trust:

3. **Trust for the Minor**:
- Setting up a trust in the name of the minor can be a viable option for managing the funds. The trust will have to file its own return, and the income will be assessed in the hands of the trust.
- However, since the TDS has already been deducted in the minor's PAN, the immediate concern is to file a return to claim the refund.

### Filing the Return and Claiming TDS Refund:

4. **Filing the Return**:
- The guardian should file an income tax return on behalf of the minor using the minor's PAN.
- Use ITR-2 if the minor has only interest income and no business income.
- Report the bank interest income under the "Income from Other Sources" head.
- Claim the TDS deducted by the bank, as reflected in Form 26AS.

### Process to File Return:

1. **Collect Documents**:
- Form 16A issued by the bank for TDS deducted.
- Form 26AS showing the TDS details.
- Bank statements showing the interest earned.

2. **File the Return**:
- Use the e-filing portal of the Income Tax Department.
- Log in using the minor's PAN and the guardian’s credentials.
- Fill in the ITR-2 form with the necessary details.
- Claim the TDS deducted in the "Tax Details" section.

3. **Verification**:
- After filing, verify the return. This can be done through Aadhaar OTP, net banking, or sending a signed ITR-V to CPC, Bangalore.

### Important Considerations:

- **Exemption Limit**: The minor’s income, if not clubbed, is subject to the same exemption limits as an individual. For FY 2022-23, the basic exemption limit is ₹2.5 lakhs.
- **Documentation**: Keep all documents, including death certificates of the parents, proof of guardianship, and TDS certificates, handy for reference and verification.
- **Legal Advice**: It might be beneficial to consult a tax professional or a legal advisor to handle the setting up of a trust and to ensure all compliance and documentation are in place.

### Summary:
- The guardian should file the return on behalf of the minor using the minor’s PAN.
- Claim the TDS refund through the ITR.
- Setting up a trust can be considered for long-term financial management.

By following these steps, you can ensure that your cousin's income is properly reported and that any excess TDS deducted is refunded.