Will an NRI minor’s foreign bank interest income get clubbed?

My minor son moved to the US last year for studies. I had gifted him money in his US bank account, where I’m his custodian on record. This year, some of the funds lying in excess in the US were put in a short-term deposit in the US, and some were sent back to his NRE account in India. Will the interest income on these accounts also be clubbed in my hands?
-Name withheld on request

I assume that your son is a non-resident under the Indian tax laws, whereas you are a resident under the Indian tax laws. If a parent gifts money to a minor child, any income generated from investing those gifted funds (whether in fixed deposits, shares or other income-generating assets) must be clubbed with the parent’s income under Indian income tax laws.

The law stipulates that the total income must first be computed in the hands of the minor and then clubbed with the income of the parent who has the higher total income between both spouses. This means that, before clubbing, the total income that accrues to the minor must first be determined according to the relevant provisions of the Income Tax Act, 1961 (including the provisions dealing with the scope of total income).

The interest earned on US short-term deposits accrues outside India to your NRI son and is not includible in his total income for Indian tax purposes. Similarly, interest from NRE account is explicitly exempt from tax, provided your son qualifies as an NRI under FEMA requirements. Since these incomes themselves are not includible in the total income of the minor, these would also not be includible in your total income, except for reporting purposes (for e.g. disclosing NRE interest under exempt incomes).

It is important to note that only the income (and not the underlying assets) is clubbed under Indian tax laws. Therefore, you are not required to disclose either the US bank account or these deposits in the ‘foreign assets’ (Schedule FA) section of your Indian tax return, which is meant for the disclosure of foreign assets.

If the tax authorities allege that you are seeking to reduce your tax liability by resorting to such an arrangement, then such non-taxability may be challenged.

Harshal bhuta is a partner at pr bhuta & co. Cas.