Section 10(32) of the Income Tax Act, 1961 is an important provision that deals with the taxability of income received by a minor child. This section provides for certain exemptions from tax for income earned by a minor child.
In this blog, we will discuss the various aspects of Section 10(32) of the Income Tax Act, including its applicability, scope, and benefits.
Applicability of Section 10(32)
Section 10(32) applies to any income earned by a minor child. A minor child is a person who has not attained the age of 18 years. This provision applies to all types of income, including salary, interest, dividend, rental income, etc.
Scope of Section 10(32)
Section 10(32) provides for the following exemptions from tax for income earned by a minor child:
a. Exemption up to Rs. 1,500 per year
Any income earned by a minor child up to Rs. 1,500 per year is exempt from tax. This exemption is available for each minor child, and therefore, if there are more than one minor child in a family, each child will be entitled to an exemption of Rs. 1,500 per year.
b. Clubbing of income
In cases where the income of a minor child exceeds Rs. 1,500 per year, the income is clubbed with the income of the parent whose total income is higher. This is known as the clubbing of income provisions, and it is aimed at preventing tax evasion by transferring income to minor children.
c. Exceptions to clubbing of income
There are certain exceptions to the clubbing of income provisions. These include:
- Income earned by a minor child from manual work or activity that is not related to any business or profession.
- Income earned by a minor child from any activity involving his or her skill, talent, or specialized knowledge and experience.
d. Taxation of income above exemption limit
Any income earned by a minor child above the exemption limit of Rs. 1,500 per year and not falling under the exceptions to clubbing of income provisions is taxable at the applicable tax rate.
Benefits of Section 10(32)
The benefits of Section 10(32) are as follows:
a. Tax savings
Section 10(32) provides for an exemption of up to Rs. 1,500 per year for income earned by a minor child. This results in tax savings for the parent or guardian of the child.
b. Encouragement to save and invest
By providing an exemption for income earned by a minor child, Section 10(32) encourages parents to save and invest on behalf of their children.
c. Exceptions to clubbing of income
The exceptions to the clubbing of income provisions provide relief to parents whose children earn income from their own skills, talent, or specialized knowledge and experience.
How to claim the exemption under Section 10(32)
To claim the exemption under Section 10(32), the parent or guardian of the minor child needs to include the child’s income in their own tax return. They will need to fill out Form 2 for this purpose. In the tax return, the parent or guardian can claim the exemption of up to Rs. 1,500 per year for each minor child.
Impact of Section 10(32) on tax planning
Section 10(32) has an impact on tax planning for parents. Parents may choose to invest in instruments that generate income that is exempt from tax under Section 10(32), such as bank deposits or fixed deposits. This can help them save tax and build a corpus for their child’s future.
Case law related to Section 10(32)
There have been several cases related to the interpretation and applicability of Section 10(32) of the Income Tax Act. In one such case, the Delhi High Court held that income earned by a minor child from investing in shares is not exempt from tax under Section 10(32). The court held that investing in shares is a specialized activity that requires skill and knowledge, and therefore, the income earned from it cannot be exempt under Section 10(32).
Tax implications of gifts to minor children
One common way that parents invest for their children is by gifting money or assets to them. However, there are tax implications to such gifts. Under Section 64(1A) of the Income Tax Act, if a parent gifts money or assets to their minor child, any income earned from such gifts will be clubbed with the parent’s income and taxed accordingly. However, if the money is invested in a manner that is exempt under Section 10(32), such as a bank deposit, the income will not be clubbed with the parent’s income.
Tax implications of guardianship
In cases where the parents are not alive or are unable to take care of the child, a guardian may be appointed to take care of the child’s affairs. In such cases, the guardian will be responsible for filing the child’s tax return and claiming any exemptions or deductions that are available under the Income Tax Act. The guardian may also need to provide documentation to prove their guardianship status.
Importance of maintaining proper records
It is important for parents and guardians to maintain proper records of the income earned by the minor child and the investments made on their behalf. This will help in filing accurate tax returns and claiming the appropriate exemptions and deductions. In case of any disputes with the tax authorities, proper documentation can also serve as evidence of the child’s income and investments.
Impact of recent amendments to the Income Tax Act
The Income Tax Act has undergone several amendments in recent years, which have had an impact on the tax treatment of income earned by minor children. For example, the Finance Act 2020 introduced a new provision, Section 115BAC, which provides for lower tax rates for individuals who opt for it. However, this provision does not apply to income earned by a minor child that is clubbed with the parent’s income under Section 64(1A).
Conclusion
In conclusion, Section 10(32) of the Income Tax Act, 1961 provides for an exemption of up to Rs. 1,500 per year for income earned by a minor child. While the income above this limit is clubbed with the income of the parent whose total income is higher, there are exceptions to this rule. This provision provides tax savings and encourages parents to save and invest on behalf of their children.
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Frequently Asked Questions (FAQs)
- What is Section 10(32) of the Income Tax Act?
Section 10(32) of the Income Tax Act provides for an exemption for income earned by a minor child.
2. Who can claim the exemption under Section 10(32)?
The parent or guardian of a minor child can claim the exemption under Section 10(32).
3. What is the maximum exemption amount under Section 10(32)?
The maximum exemption amount under Section 10(32) is Rs. 1,500 per year for each minor child.
4. What types of income are exempt under Section 10(32)?
Income earned by a minor child from any source, including investments, is exempt under Section 10(32).
5. Is there an age limit for the child to qualify for the exemption under Section 10(32)?
No, there is no age limit for the child to qualify for the exemption under Section 10(32).
6. What is the process for claiming the exemption under Section 10(32)?
The parent or guardian of the minor child needs to include the child’s income in their own tax return and fill out Form 2 to claim the exemption.
7. Can the exemption under Section 10(32) be claimed for more than one child?
Yes, the exemption under Section 10(32) can be claimed for each minor child.
8. Is the exemption under Section 10(32) limited to Indian citizens?
No, the exemption under Section 10(32) is available to all taxpayers, whether they are Indian citizens or non-residents.
9. Is there any impact of Section 10(32) on tax planning for parents?
Yes, Section 10(32) has an impact on tax planning for parents, as they may choose to invest in instruments that generate income that is exempt from tax under Section 10(32).
10. What are the tax implications of gifts to minor children?
Under Section 64(1A) of the Income Tax Act, any income earned from gifts made by a parent to their minor child will be clubbed with the parent’s income and taxed accordingly. However, if the money is invested in a manner that is exempt under Section 10(32), such as a bank deposit, the income will not be clubbed with the parent’s income.
