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

Income Tax Income from Capital Gains
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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. Thus, the only way he can own stocks is in the following ways:

  • Transfer of shares between family members
  • Receive shares as gift/inheritance
  • Shares alloted through investment in IPO

Minors can place equity sell orders and apply for IPOs and buybacks.

A minor can earn only two kinds of income — capital gains and dividend income. The tax implications on these earnings are as follows:

A) Capital gains: If a minor earns capital gains, those will be clubbed with the income of the higher-earning parent and they will have to bear the entire tax liability on the same.

If the holding period is more than 12 months, the gains will be classified as long-term and taxed at 10%, while a short-term capital gains (STCG) tax of 15% is applicable in case the holding period is less than 12 months.

In case shares were acquired through gifts or transfer of shares, holding period is calculated as per the date on which the shares were originally purchased by the previous owner.

If you want to learn more about how are gifted shares taxed, read here.

B) Dividends: Similar to capital gains, dividend income earned by a minor will be clubbed in the hands of the higher-earning parent and it will be taxed at their applicable slab rate under ‘income from other sources’ head.

Remember, if the dividend received in the entire financial year exceeds ₹5000, a 10% TDS will be deducted by the company paying dividends. However, the parent can claim the credit of the TDS while filing the ITR.

Here are some other key considerations:

  • Once the income of a minor is clubbed in the hands of one parent, the income shall be clubbed in the hands of the same parent for the succeeding years.
  • Income here includes both profits and losses. Hence, the losses will also be clubbed and the parent can use them to set off against other gains and even carry forward them.
  • The parent can also claim a tax exemption of up to ₹1,500 per child on the clubbed income, only if they are filing under the old regime.
  • Here, a child in relation to an individual includes a stepchild and an adopted child as well.
  • In case of a divorce, the income will be clubbed in the hands of the parent who has custody of the child.

So, these are the primary considerations and tax implications on a minor’s demat account. If you have any questions, you can ask us below in reply to this thread.

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In the case of a minor earning capital gains, these gains will be combined with the income of the higher-earning parent.

  • Let’s consider a scenario where A and B are parents of C. Although A earns more than B, B is the legal guardian of C. B, as the legal guardian, has a Zerodha account and has linked C’s Zerodha account as a minor. Now, when there are capital gains for C, does this imply that these gains should be reported by A? If so, I am trying to understand the primary purpose of investing via a minor account. Is it primarily for instilling investment habits in minors, or does it serve other purposes that has advantage from financial standpoint ?
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If I transfer Bonds to Minor. What will be interest earned on the bonds? Will that income added under parent income? Or can minor file a separate income?

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Hey @surestce,

The interest in this case will be clubbed to parent’s income.

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If I transfer bonds to minor, will the interest income from bonds will be treated as income for Minor? Can file ITR for minor account under income?

Or the interest income will be clubbed with parent (guardian) income?

Please help to clarify. Thanks.

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ok got it. Thanks @Surbhi_Pal for quick response.

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Hey @stonelazy,

A legal guardian is appointed by court in absence of both the parents. In your case, the capital gains will be clubbed in the hands of the higher-earning parent only.

The primary purpose would be inculcating a habit of investment among children. Any capital gains would be clubbed in parents’ income. However, if these gains are further reinvested, any income from that will be taxed in the hands of minor only.

Hope this clarifies.

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I’ve opened a Zerodha minor account for my child. As a parent, if I transfer shares and/or mutual funds as gifts and deposit them into my child’s Zerodha minor account, are there any tax implications? If so, what is the limit for transferring without incurring any tax liability?

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Hi Divygyan,
There are no tax implications involved in the gifting process to your child’s account since gift from ‘relative’ is exempt under under Income Tax Act.

However if the gifted shares/mutual funds are sold subsequently or if there is any dividend income from these gifted shares, then clubbing provisions will apply (i.e: such income will be clubbed in the income of higher-earning parent).

See this article for detailed information regarding the same.

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Hi @Divygyan_Jindal,

I’ve linked your post to the right thread. This should clarify your query.

Let us know if you have any doubts.

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What happens to the minor account once the minor becomes major? Will the capital gains and dividends after becoming major be still clubbed to parent?

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Hey @vkarthikeyan85,

Once the child turns major, i.e. above the age of 18, any capital gains would be taxable in their hands and not the parents.