For parents looking forward to making investments in equities and mutual funds in the name of their children, the process involves the submission of documents in offline and not online mode. Also, there is no restriction when it comes to investing in a mutual fund scheme in the name of a minor.
For this purpose, a separate account is required to be opened through the submission of physical copies of all the related documents, which include authentic evidence of the age of the child, proof of the child’s relationship with the guardian, a copy of the birth certificate of the child or a passport is acceptable as a supporting document of the age of the child and the relationship to the guardian.
It is possible for a parent to open a demat (dematerialised) account in the name of the minor to invest in shares. A separate mutual fund folio is required to be created to invest in the name of the child. Also, the term minor child comprises all children, including stepchildren and adopted children.
Capital gains arising from investments made in shares and mutual funds in the name of minor attract the clubbing provision of the Income-Tax Act (ITA), 1961. Any income arising or accruing to investments made in a minor child’s name is added to the parent’s or legal guardian’s taxable income in case the source of funds was the parent itself.
In addition, the income is clubbed in the hands of the higher-earning parent. For instance, let’s say, in case a parent had invested Rs 75,000 in a mutual fund in the name of their minor child. It may so occur that the parent who had the least income among both parents contributed single-handedly to this investment. However, to calculate income tax, any income from the sale of such investment while the child continues to be a minor, will be clubbed with the income of either of the parents who are earning more.
While the payment source for this particular investment can be either of the parent, during the time of redemption, the gains shall be only clubbed with the income of the higher-earning parent.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.
