Mayank, a 12-year-old, has made history by becoming the youngest child to win ₹1 crore on the ‘Kaun Banega Crorepati 15’ during its ‘KBC Juniors Week.’ With talented kids like Mayank winning prize money in contests and shows, questions arise regarding the taxation of their income. The same concerns apply to other sources of income for minors. So, how exactly is the income of a minor taxed?
According to Abhishek Soni, the CEO of Tax2Win.in, minors are required to pay tax on their income at a flat rate of 30% on a gross basis, as per section 115BB of the Act. Additionally, there is a health and education cess of 4% on the basic tax liability. Income earned by a minor child from activities involving their skills, talent, or specialized knowledge is generally subject to taxation. The entity that disbursed this income would have already deducted tax from the prize money at the flat rate of 30%, plus health and education cess of 4%. Moreover, no tax deduction or exemption is allowed against this type of income for minors.
When it comes to distinguishing between ‘earned’ and ‘unearned’ income, earned income refers to the money a minor earns through manual work or by applying their skills, talents, specialized knowledge, or experience. On the other hand, unearned income includes funds received as gifts or interest accrued from savings accounts or investments in the minor’s name facilitated by parents. According to section 64(1A) of the Income Tax Act, any such income received by a minor is included in the parent’s income, known as “clubbing of income.”
The Income Tax Act provides tax exemption on income up to ₹1,500 per child, with a maximum of two minor children. If the minor’s income exceeds ₹1,500 annually, it will be clubbed with the higher-earning parent’s income for tax purposes, but a tax exemption of ₹1,500 per child per year, up to a maximum of two children, is available to parents.
When it comes to investing in mutual funds or equities in the name of a minor, there are no restrictions. However, the process usually requires offline procedures, and the income from any such investment falls under the category of unearned income and is taxed accordingly.
In summary, if a minor generates income from competitions, performances, or personal business, it qualifies as earned income, separate from the parent’s or guardian’s earnings. The minor must file an income tax return and obtain a PAN card for this purpose.
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