Investing in mutual funds in a child’s name is increasingly being seen as an effective way for parents to set aside long-term savings for education and other major future expenses. However, before choosing this option, investors should clearly understand the key considerations and implications involved.
CAN A MUTUAL FUND INVESTMENT BE MADE IN A MINOR’S NAME?
- Mutual fund investments can be made in a minor child’s name across all scheme categories, with the child being the sole and first holder and no joint holders allowed.
- The account must be operated by a guardian, who can be either a parent or a court-appointed legal guardian.
- The guardian manages the investment until the child turns 18, after which full control of the account shifts to the child.
ANY RESTRICTION ON TRANSACTIONS THAT CAN BE DONE IN A CHILD’S MUTUAL FUND ACCOUNT?
All transactions
- Systematic investment plans (SIPs),
- Systematic transfer plans (STPs),
- Switches or
- Redemptions
can be carried out in the child’s account, operated by the guardian. This will continue until the child becomes a major.
HOW DOES THIS WORK? WHAT DOCUMENTATION IS REQUIRED?
- To invest in a mutual fund in a child’s name, valid documents must be submitted to establish the child’s age and the guardian’s relationship with the child.
- Accepted documents include the child’s birth certificate, passport copy, or PAN, which confirm the date of birth and whether the guardian is a natural or legal guardian.
- These documents are required at the time of the first investment or while opening the folio.
- Additionally, the guardian must be KYC-compliant to operate the account.
WHAT HAPPENS WHEN THE CHILD TURNS 18?
Once the child attains the age of 18, all ongoing SIPs and STPs in the folio are automatically suspended, and the guardian’s authority to operate the account ceases. The folio is frozen until the status is updated, after which the child must take over independent operation of the account. To convert the folio from ‘minor’ to ‘major’, the individual is required to submit a prescribed application form along with the necessary documents, complete KYC formalities, and provide a KYC acknowledgement letter.
HOW DOES TAXATION WORK FOR A CHILD WHEN HE IS BELOW 18 YEARS AND AFTER HE TURNS MAJOR?
Before the child turns 18:
If the investment is redeemed while the child is still a minor, the capital gains are clubbed with the parent’s taxable income. The parent must then pay tax on these gains at their applicable tax slab rate.
After the child turns 18:
Once the child becomes a major, they are treated as an independent taxpayer. Since most 18-year-olds typically have no other income, they can benefit from the basic exemption limit of ₹4 lakh under the new tax regime. They also receive their own annual exemption of ₹1.25 lakh for long-term capital gains, reducing the tax impact significantly.
