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.

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When minor turns 18, Capital Gain amount to be paid by Minor shall be calculated from date of purchase of equity / units by Parent or from the date of gifting / transfer?

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Hey @Deepankar_Gupta,

The date of purchase will be taken as of when the shares were originally purchased by the parent.

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Hi @Surbhi_Pal if shares are allotted through an IPO allotment to a minor demat account, can those shares be transferred to their parent’s demat account?

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I’ve the same question @Surbhi_Pal
@prashant have you found out the answer to your own question?

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Can you explain it with an example: Say, Rs. 1lakhs was invested in Nifty50 on 05-Apr-2023 and all was redeemed on 06-May-2024 for Rs. 1,10,000.
Now capital gains will be Rs. 10,000 and clubbed to parent’s income.

Now, If Rs. 90,000 is further invested in Nifty50 on 07-Jun-2024 (rest 20K stays in bank account), and how will the new capital gains on initial Rs. 10,000 be taxed? Say, 90K (all) principal was redeemed for Rs. 99K on 25-Sep-2024. i.e. will the gains on Rs. 10K be taxed in minor’s income and gains on Rs. 80,000 be clubbed in parent’s income? i.e now gains of Rs. 9,000 on 25-Sep-2024. Is my interpretation right: Rs. 1,000 will be minor’s income and that won’t be clubbed with parent’s income and the parent will club income of only Rs.8,000 in his own ITR?

Making it more complex
Instead, if that Rs 90,000 was invested equally in Nifty50 and NiftyNext50 which gave different returns (redeemed on same date). Then against which (Nifty50 or NiftyNext50) will be the Rs.10,000 principal be adjusted: the higher performing asset or lower performing asset? How will we choose?

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Please, confirm for IPO allotments to minors: how will the capital gains be taxed? clubbing it to the parent’s income or treating it as the income of a minor? & same question for dividends for IPO allotments to minors?

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I thought that every year, whoever is the higher earning parent, income of minor will be clubbed to the higher earning period every year.

Please, confirm

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A minor’s demat account is subject to tax implications based on the income generated through investments, which is clubbed with the parent’s income and taxed accordingly. If the income exceeds a certain threshold, it may attract capital gains tax.