How Are Minor Investments Taxed in India?

Taxation is one of the most important considerations for parents.

Under the income-tax rules, income of a minor child is generally clubbed with the income of a parent under the applicable provisions, subject to specified exceptions.

The Income Tax Department currently states that under Section 64(1A), minor income may be clubbed with the parent's income and that Section 10(32) provides an exemption of up to ₹1,500 per minor child, subject to the applicable conditions.

What types of income can be relevant?

Depending on the investment, the tax treatment can involve:

• interest

• dividends

• capital gains

• other investment income

The tax treatment depends on the nature of the investment and the applicable provisions.

Exceptions to minor-income clubbing

The clubbing rule is not absolute.

There are statutory exceptions, including certain income arising from the minor's own manual work or from the application of the child's skill, talent or specialised knowledge, subject to the applicable conditions.

Parents should consult a qualified tax professional where the minor's investment income is significant or the family's tax structure is complex.

Tax on Equity Mutual Funds and Shares

For specified equity investments, current tax rules provide for special capital-gains treatment.

The Income Tax Department states that short-term capital gains covered under Section 111A on specified securities, including equity shares and equity-oriented mutual funds, are currently taxed at 20%, subject to the applicable conditions.

For specified listed securities, long-term capital gains are currently taxed at 12.5% on gains exceeding ₹1.25 lakh, subject to the relevant provisions and conditions.

The fact that the investment is held by a minor does not mean that market-linked investment income is automatically tax-free.

Because tax rules can change and the final tax liability depends on the parent's circumstances and the type of income, families should verify the applicable provisions for the relevant financial year.

Is a Minor's SIP Tax-Free?

No.

A minor SIP does not automatically become tax-free simply because the investor is under 18.

The tax treatment depends on the income generated and the applicable clubbing provisions.

For example, capital gains from an equity mutual fund can be taxable under the applicable capital-gains rules. The minor's investment income may also be clubbed with the parent's income, subject to the law and exemptions.

Therefore, minor status does not mean zero tax.