Many of us open a bank saving account or open a Bank Fixed Deposit in the name of our minor childrens. Have you ever thought who will pay tax on that interest amount from FDs or Interest from saving bank account. If you have opened a savings account or a fixed deposit in the name of your minor child, the interest earned will be taxable.
Say you opened a FD of Rs.1,00,000 for 1 year in bank in the name of your minor son/daughter @ 8% rate of interest. Interest at the end of 1 year will be Rs.8243. (Interest yield comes out to be 8.243% due to quarterly compounding)
This Rs.8,243 should be shown in your ITR & taxed accordingly.
You can claim an exemption of up to 1,500 per child in a year (for two children only). So each parent can claim this amount separately for two childrens.
In the above example you can claim 1,500 as standard deduction & pay tax on the remaining Rs.6,743
Who will pay the Tax
The amount will be clubbed with the income of the parent who earns more and is taxed accordingly. However, once clubbed, the same parent will continue to bear the tax burden even if the earnings ratio changes.
What if the child has earned money on his own
On the other hand, if your child has earned money himself, the income cannot be clubbed and a separate tax return will have to be filed. However the interest credited in his account by depositing this amount will be clubbed with the guardians income.
Say your child earned Rs.1,50,000 in the year 2013-14 by doing a stage show. FD in bank is being made in his name @ 9% . Interest generated from this FD in 2014-15 will be Rs.13,963. Though Rs.1,50,000 will be taxable in the name of your child in the year 2013-14 but you need to pay tax on the interest amount out of that money in the year 2014-15.
Note: So in order to avoid tax on interest income, it’s better to invest the money in instruments where interest income is tax free. Eg Public Provident Fund.
Other Special Cases when Clubbing is Not Attracted
Income of minor child (from all sources) suffering from any disability u/s 80 U
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