You invest diligently for your child’s future, choosing instruments that promise steady growth. Yet, a common administrative gap could be silently eroding those returns, forcing you to pay tax twice on the same income. This happens when tax credits on your minor child's investments get stranded, a subtle but costly problem that can be fixed with one simple declaration.
The Hidden Tax Trap
When you invest in your child’s name, such as in a fixed deposit, the bank or financial institution is required to deduct tax at source (TDS) on the interest earned. The bank correctly reports this TDS against the Permanent Account Number (PAN) linked to the account — which is your child’s PAN. This is where the problem begins.
According to the Income Tax Act, the income of a minor child is generally “clubbed,” or added, to the income of the higher-earning parent. You are responsible for declaring this income on your tax return and paying the appropriate tax on it. This creates a critical mismatch for the tax authorities. The income appears on your tax return under your PAN, but the corresponding tax credit (the TDS) is logged against your child’s PAN in their Form 26AS. The system does not automatically link the two, leaving the credit unclaimed.
Why the Credit Stays Stranded
The bank is simply following procedure. Its obligation is to deduct and report tax against the account holder’s PAN. It has no visibility into the complex clubbing provisions that apply to your family’s tax situation. For the Income Tax Department, the data is clear: the TDS was credited to one PAN, while the income was reported by another. Without a specific instruction to connect them, the credit remains stranded.
This isn't a theoretical problem; it has a direct financial impact. Because you cannot claim the TDS credit from your child’s account, you end up paying the full tax liability on the clubbed income out of your own pocket. The initial tax deducted by the bank becomes a sunk cost — a capital leak that reduces the effective return on your child’s investment. Many parents pay this double tax year after year, often because the process of reconciling a minor’s tax forms feels too administratively complex.
The Solution: A Simple Declaration Under Rule 37BA
Fortunately, there is a clear, legal remedy designed specifically for this situation: Rule 37BA of the Income Tax Rules. This rule allows for the TDS credit to be claimed by the person in whose hands the income is ultimately taxed.
To make this work, you must submit a formal declaration to the deductor (the bank). This declaration informs the bank that while the investment is in the minor’s name, the income is legally clubbed with yours. You provide your PAN and request that they report the TDS directly against your PAN instead of the child's. Once the bank processes this declaration, the TDS will appear correctly in your Form 26AS. This aligns the income and the tax credit under a single PAN, ensuring you can claim the credit and avoid double taxation.
Taking this step proactively closes the loop. It turns a frustrating administrative burden into a simple, one-time fix that protects your investment returns. A small amount of paperwork now prevents significant financial leakage for years to come.
Don’t let stranded TDS credits undermine the growth of your child’s portfolio. You can download a pre-filled Rule 37BA declaration form directly from your Sigfyn Document Vault. Submit it to your bank today to ensure every Rupee of tax paid works in your favour.
