Tax Planning for Minor Account

[Prateek_Sen]

If I open minor bank accounts and DMAT accounts for my 16-year-old son and daughter, can I transfer a sum to them and buy shares and hold for 5-7 years later allowing them to realize profits worth 5 Lakhs each year without any salary or business income in those accounts until they have a real job or business? Will there be any tax implications, or am I missing something? Of course, the profits will belong to my children.

[Surbhi_Pal]

Hi @Prateek_Sen,

I’ve written about this in-detail on this thread:

What are the tax implications on minor’s demat account?

A demat account is mandatory for investing in shares, ETFs, and listed bonds. Some parents may wish to invest in shares in their children’s names. To do this, they are required to open a demat account for their minor child. However, it’s important to note that a minor’s demat account must be managed by their parent until the child turns 18. At that point, it can be converted into an individual account. What are the tax implications on a minor’s demat? Firstly, a minor cannot buy securities. T…

If you have any further doubts, please let me know.

[Suchi]

Hi Surbhi,

I had a query re investing on behalf of minors.

We recently started a few monthly SIPs (5k each) from our minor son’s account. The aim is to slowly build a good corpus over the next 15-20 years, which we may utilise for his higher studies etc.

We, as parents, gift some money to him (via online transfer) yearly. Additionally, whatever cash he gets on his birthday and all these festivals (from relatives) is also diverted to his savings account (as cash deposits). The total deposits are in the vicinity of 2.5 Lacs yearly - which forms the source of these monthly SIPs/investments.

Now, since we don’t intend to redeem any of it sooner, it shouldn’t attract the clubbing provisions. And once he attains majority, all redemptions (if any) will be taxable in his hands only.

However, these investments are visible u/ our PAN in the IT portal (AIS). So, how should one report such ‘minor investments’ (made from gifted money from parents & relatives) at the time of filing the ITR?

We are also keen to know if this the best way to go about minor investing or, is it advisable to apply for a separate PAN for a minor, formalise the investments u/ their own PAN and start filing their ITR too (on their gifted/passive income?) - so that all these investments are visible u/ their own AIS? Or, this would lead to duplicate-reporting on both minor’s as well as parent’s PAN?

Would appreciate your insights into the best practices around this topic.

[garg.pulkit131]

Hi @Suchi

Seems like the investment are being made in your name (PAN) and that is the reason they are reflecting against your name (PAN) in the Annual Information Statement. Any income earned on such investments shall be taxable in your hands itself as it is being reported on your PAN.

It would be better to have a separate PAN for Minor child, however, do note that in this case as well any income earned on such investments shall be clubbed in the income of parent as per the provisions of section 64 of Income Tax Act, 1961. Thus, if the redemption takes place only after the minor child attains majority, the same shall be assessed in his/her own hands. However, if it is before minor child attains maturity, then any income/gains arising therein shall be clubbed in the income of parents.

Hope this clarifies. Let me know in case of any other concerns.

Thanks

[Surbhi_Pal]

Hi @Suchi,

As rightly mentioned by @garg.pulkit131, these investments are being made against your PAN and in future if you redeem these, the income will be taxable in your hands only.

It will be best if the minor has their own PAN and investments are made from their accounts.

[Suchi]

Hi Surbhi/Pulkit,

These investment are being made from the minor’s bank account only.

However, as you are well aware, parent’s KYC (PAN) is needed for the Bank Account opening as well as during setting-up the SIPs with any MF AMC - which is why these investments are getting reflected again my PAN.

Like I mentioned earlier, this source of these minor investments is largely minor’s ‘passive income’ from gifts (both online & cash deposits) along with minuscule ‘active income’ (which he earns from shoe art, school olympiad & singing shows).

Accordingly,

1. How should one report such ‘minor investments’ (made from gifted money from parents & relatives) at the time of filing their own ITR?

2. Or, as advised, if we apply for a separate PAN for the minor, so as to formalise these investments u/ his own PAN - would it solve this issue?

3. And should we start filing minor’s separate ITR too - so that all these investments are visible u/ his own AIS? Is ITR filing advisable/mandatory in such cases?

4. I hope this won’t lead to ‘duplicate-reporting’ on both minor’s as well as parent’s PAN?

Thanks again for your time & attention.

[Surbhi_Pal]

Hey @Suchi

@Suchi

Or, as advised, if we apply for a separate PAN for the minor, so as to formalise these investments u/ his own PAN - would it solve this issue?

This may be the way to go about it.

@Suchi

And should we start filing minor’s separate ITR too - so that all these investments are visible u/ his own AIS? Is ITR filing advisable/mandatory in such cases?

Yes, you can file the ITR, there’s no harm in it.