Which parent will pay the income tax on gains made from selling investment in minor child’s name after divorce? However the situation changes when the parents are divorced, nonetheless income tax must be paid still. Read here to know which parent has to pay income tax on behalf of minor after the divorce
Any income accrued or received on investments made in the name of a minor child is clubbed with the income of the parent as the case be. However, what happens when parents are separated or get divorced, which parent will have to take care of tax liabilities related to the minor child?Most of the parents going through such a phase of life are not aware of this taxation aspect of their divorce. In case of divorce, minor's incomes are clubbed, i.e. included with the total income of the parent who maintains the minor child after divorce.
"In case the marriage of the parents does not subsists (such as divorce), the income/gains shall be clubbed with the income of the parent who has maintained the child during the year. Usually when the parents are married, any income on investments and capital gains arising on sale of investments made by the parents in their minor child's name shall be included in the gross total income of the higher-earning parent," says Dr Suresh Surana, Founder, RSM India, a tax and business consulting group.
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How will minor child's income get clubbed with the divorced parent?
While the law makes it clear that the parent who maintains the child has to pay the income tax liability of the minor child, arguments could arise when the child is being jointly maintained by both parents. It may happen that both the father and mother are earning an income and they both equally contribute to the maintenance of their child, even after a divorce. Hence, both parents might argue about who gets the responsibility to pay income tax on their minor child's investment income.You Might Also Like:
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"It can be asserted that the parent responsible (as per the Divorce's terms) for the well-being of the minor child can be considered as the one maintaining the child i.e. one who has custody. Accordingly, the minor child's income will be clubbed with that parent's income," says Rahul Singh, senior manager, advisory and research, Taxmann.
Tax experts say that the responsibility of paying income tax on behalf of the minor child cannot be split between the divorced parents. Either one of the parents has to bear the full responsibility for paying income tax on the gains of the minor. "Parents will not get any excuse from not paying tax on behalf of a minor's income. If there is a gain made on investment in the name of minor then as per the Income-tax act, demand of tax if any, will be recovered from the divorced parent by the Income Tax Department. It is not possible to split the income tax implications of gains made from minor child's investments in equal or any other ratio," says chartered accountant Abhishek Jain, partner, Kailash Chand Jain & Co.
So divorced parents must have a clear demarcation and communication regarding the tax liability related to the minor child.
Situations which can lead to problems in divorce cases
Sometimes divorces are amicably settled, while sometimes it is a long-contested fight in court. In the event of a contested divorce, multiple contestations, allegations, interpretations can lead to problems. One such case is maintenance expenses of the minor child and responsibility for paying income tax on the minor's behalf. It could happen that none of the parents would want to take up the responsibility for paying income tax on behalf of their minor child.You Might Also Like:
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According to Surana, "In case of divorce, the parent who maintains the minor child would be mandatorily required to pay tax on their minor child's income owing to the clubbing provisions. In case such parent as designated to pay taxes denies bearing the income tax, they may be subjected to interest and penal consequences for non-payment and/or under reporting of income. They may be liable for penalty under section 270A up to 50% of the tax for under-reporting of income in the tax return."
Experts say that even if the parents argue about the minor's income tax responsibility because one of the parents majorly bore the minor's maintenance expenses, it is not a valid excuse for not paying tax. In the absence of the final settlement during divorce proceedings if one parent paid the tax that does not mean the same parent has to bear it after the divorce. The parent who is maintaining the minor child after divorce has to pay the income tax on behalf of the minor, irrespective of the fact that before the divorce which parent contributed how much money for the child's wellbeing.
"The provisions of the Income-tax act do not provide for such exclusion to allow parents to excuse themselves from paying taxes on their minor child's income solely because he or she bore the maintenance expenses of the child before the divorce. Therefore, the parent maintaining the child after the divorce would be mandatorily subjected to clubbing provisions and needs to pay the necessary tax on the minor child's income," says Surana.
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This story originally appeared on: India Times - Author:Faqs of Insurances
