Law Commission Submits 265th Report- ‘Prospects Of Exempting Income Arising Out Of Maintenance Money Of Minor’ [Read Report]

Income earned by way of interest on the amount of maintenance deposited in favour of the child does not require to be exempted from being clubbed with the income of the parent/ guardian; as such exemption, if granted, would open flood gates of tax evasion, recommended the Commission.

Law Commission of India has submitted Report No; 265  titled ‘Prospects of Exempting Income arising out of Maintenance Money of ‘Minor’ to the Government on Monday.

As stated in the Report, the Punjab and Haryana High Court, while dealing with the case Payal Mehta v. Sanjay Sarin, referred the matter to the Law Commission of India for consideration as to whether the provisions of section 64(1A) of the Income Tax Act, 1961 require an amendment to provide for exemption from clubbing of minor‘s income accruing by way of interest on the amount deposited by one of the parents of the minor child as maintenance, at the hands of the other parent / guardian under an order of the Court.

The plea taken in that case was that the interest on the amount of maintenance deposited in the name of minor child should not be subjected to tax, i.e., such income be not clubbed with the income of either of the parent for the purpose of imposing the tax.

In the reference Order, Division Bench comprising Justices Rajive Bhalla and Lisa Gill said;

“The Income Tax Act, thus, does not exempt interest income accruing to a minor, on an amount deposited as maintenance and his or her income is clubbed with his/her parent's/guardian, thereby requiring the minor apart from paying income tax to pay tax at the rate paid by his guardian. The matter is, therefore, forwarded to the Law Commission of India and the Ministry of Women and Child Development, New Delhi, for consideration whether suitable amendments are required to be made in the Income Tax Act, 1961, to ensure that maintenance settled on minors is exempted from income tax or is treated differently”.

The Law Commission chaired by Justice B.S.Chouhan has made the following recommendation to the Government;

“The Commission is of the view that income earned by way of interest on the amount of maintenance deposited in favour of the child does not require to be exempted from being clubbed with the income of the parent/ guardian; as such exemption, if granted, would open flood gates of tax evasion and would defeat the very object of inserting the provisions of section 64(1A), which had been brought to plug-in the loopholes to prevent the avoidance of tax, causing substantial loss or leakage of revenue”

Read the report here.