Investing in your child's name? Know the income tax clubbing rules

On Children’s Day, many parents give gifts and invest to secure their child’s financial future. They need to be mindful of the fact that money invested in a child’s name does not necessarily lower the family’s tax bill. Parents need to understand clubbing provisions before they make these investments.  

How a minor’s income is clubbed 

Section 99(1)(c) of the Income-tax Act, 2025 (Section 64(1A) of the Income-tax Act, 1961) clubs a minor’s income with that of the parent having the higher income before inclusion. If the parents are separated, it is clubbed with that of the parent who maintains the child.  

“Income earned by a child through personal work, skill or talent is taxed in the child’s hands. The same applies to a minor with a specified disability under Section 154 of the 2025 Act (Section 80U of the 1961 Act). However, returns earned by investing the child’s independently earned income may still be clubbed with the parent’s income. The same rule applies to investments made with money gifted by grandparents or other relatives,” says Sarthak Prashar, director, global people solutions, Grant Thornton Bharat. 

New tax law: Not much changes  

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The 2025 Act retains these rules. “The exemption of up to ₹1,500 per minor child has been retained, but is unavailable under the default tax regime. The basic principle remains unchanged: Investing in a child’s name does not automatically reduce the parent’s tax liability,” says Prashar. 

Dividends and interest income from a minor’s savings accounts and fixed deposits (FDs) are generally clubbed. Capital gains retain their character and are taxed at applicable rates. 

Taxability of gifts  

Gifts from parents, grandparents, siblings, uncles, aunts and other specified relatives are exempt, regardless of amount. If gifts from friends and non-relatives exceed ₹50,000 annually, the entire amount is taxable under ‘Income from other sources’.

The income earned by investing the gifted amount is generally clubbed with the income of the parent who earns more. 

“The parent can claim an exemption of up to ₹1,500 per child. Gifts earmarked for education or marriage do not automatically escape clubbing provisions,” says Neeraj Agarwala, senior partner, Nangia & Co. 

Parents should retain gift declarations, bank records and investment statements to establish the source of funds. 

Small-savings schemes 

Sukanya Samriddhi Yojana (SSY) and Public Provident Fund (PPF) help build long-term savings. “Contributions to both schemes qualify for deduction under Section 123 read with Schedule XV of the Income-tax Act, 2025, within the overall limit of ₹1.5 lakh. Interest earned and eligible maturity proceeds are tax-exempt,” says Agarwala. 

The new tax regime disallows these deductions. Interest and maturity proceeds remain exempt. 

When the child turns 18 

Under Section 99 of the 2025 Act, income earned after 18 is taxable in the child’s hands. The clubbing of income ends.

“Existing investments need not be sold or transferred, but mutual fund and dematerialised (demat) accounts may require conversion to major status, including updated know your customer (KYC) details, permanent account number (PAN) and bank details. The original purchase cost and date of investments remain unchanged when capital gains are calculated,” says Shubham Jain, director, SVAS Business Advisors. 

Pitfalls to avoid 

Failing to report the child’s interest or dividend income in the parent’s return is a common mistake. “A gift must involve a genuine transfer of ownership. Parents cannot continue to use the money for their own expenses or route business income through a child’s account to claim tax benefits,” says Jain.

The writer is a Delhi-based independent journalist

Tax mistakes can prove costly 

•    Under-reporting income: Penalty of 50% of the tax payable on under-reported income

•    Misreporting income: Penalty can rise to 200% of the tax payable

•    Transaction mismatch: Discrepancies between reported investments and declared income may invite tax queries

•    Poor documentation: Unclear ownership or source of funds can lead to tax complications 

Source: SVAS Business Advisors