On taxing maintenance money
How to curb black money in welfare funds for minors
Should maintenance money paid by parents for the welfare of their minor child be exempted from income tax? The question has bothered the government, which is finding ways to stem the problem of black money and tax evasion.
The issue came up before the Law Commission of India after the Punjab and Haryana High Court found that it is “desirable” that Section 64 (1A) of the Income Tax Act of 1961 be amended to exempt the interest accrued on maintenance money an estranged parent pays for his or her minor child.
The plea taken in the case before the High Court in
Payal Mehta v. Sanjay Sarin
(2016) was that the interest on the amount of maintenance money deposited in the name of a minor child by the parent should not be subjected to tax, that is, such income should not be clubbed with the income of either of the parent for the purpose of imposing tax.
Section 64 (1A), as it stands now, includes that “in computing the total income of any individual, there shall be included all such income as arises or accrues to his minor child…”
The purpose of the tax provision in the Act is to plug-in loopholes to prevent the avoidance of tax, causing substantial loss or leakage of revenue.
However, the High Court insisted that such an exemption should be created. It reasoned that the “circumstances of a minor receiving maintenance are different from, say, a minor in whose name some business has been started by either of the parent or who has been advanced some gift…”
The court said the exclusion of such money paid for the welfare of a minor child residing with a single parent from the tax scanner is noteworthy. The High Court suggested that the legislature add a proviso recording such an exemption in the 1961 Act.
The Law Commission, in its 265th Report titled ‘Prospects of Exempting Income Arising Out Of The Maintenance Money of Minor’, shot down the High Court’s suggestion.
For one, it said the nature of giving maintenance to a child is different. The intent of such a judicial order directing for maintenance of a minor child is the welfare of the child. Such an order does not give any right to either of the child’s parents under any statute. Second, the issue of custody of a child and determination of the amount of maintenance are of a temporary nature. Third, and most importantly, such an exemption would open the flood gates to evasion of tax.