Any child who is less than 18 years of age is considered as a minor for tax calculation purposes. If you have a child who is a minor, his income is usually added to your income as his parent. Say for instance you have a Recurring Deposit or Fixed Deposit or an investment in Post Office Savings Scheme in your child’s name. The interest accrued from such investments is added to the taxable income of the parent.
Ensure that you declare the income earn from investments on your child’s name when you file your tax returns. If the minor child earns his money all by himself, he can file tax returns on his name. In such cases the income earned from the investments on the child’s name will not be clubbed with that of the parent.
Invest in tax free financial products like ULIP, Mutual Funds(upto 1 Lakh Gain) and PPF to avoid clubbing your income with that of your minor child.
Remember, income earned through investments in Fixed Deposits or National Savings Certificate in your child’s name attracts tax. Such income is clubbed along with yours and tax calculated accordingly. Creating a Private Trust can help you save on tax. However, the process involved in creating one can be demanding.
Considering all such options available to save tax, we recommend investing in ULIP,PPF and Mutual Fund(Gain upto 1 Lakh) which attracts nil tax. It will also save you from issues like clubbing of income or filing separate or combined income tax returns.