If you have opened a for your child below 18 and are investing in mutual funds and shares on their behalf, you may wonder how the income from these investments will be taxed and reported in the .
Under Securities and Exchange Board of India (SEBI) rules, a minor can hold a demat account, which must be operated by a guardian until the child turns 18. The guardian is generally the father or mother.
Here’s what parents need to know about reporting a minor’s investment income.
Does a child’s ITR need to be filed?
No.
Isha Sekhri, Founder, Isha Sekhri & Associates LLP, said, “A demat account is held in the child’s name, with the parent operating it using the child’s own PAN. It is the child’s income but is clubbed in the parent’s return.”
The clubbed income is reported in the parent’s ITR-2 (or ITR-3 if the parent has business income). ITR-1 cannot be used when a minor’s income is clubbed because it does not contain Schedule SPI.
If the child turns 18 during the financial year, income earned after attaining majority is treated as the child’s own income, she added.
Which parent should include the child’s income in their ITR?
Sekhri mentioned the key conditions:
- Subsisting marriage (parents are married and the marriage is continuing): The income is included in the total income of that parent whose total income (before including the minor’s income) is higher.
- For example, if the father earns ₹12 lakh and the mother earns ₹8 lakh a year, the minor’s income will be clubbed with the father’s income.
- Non-subsisting marriage (parents are separated or the marriage has ended): The income is clubbed with the parent who maintains the minor child during the year.
Once the income is included in the income of one parent, it shall continue for subsequent years unless the Assessing Officer (AO) agrees to a change, she added.
How are capital gains and dividends of a minor child taxed?
Sekhri said the income is taxed in the parent’s hands, but its original character remains unchanged. Dividends are taxed at the parent’s slab rate. STCG on equity is taxed at 20%. LTCG on equity is taxed at 12.5% on gains above ₹1.25 lakh.
The ₹1.25 lakh exemption applies to the parent’s aggregate eligible LTCG, including the minor’s clubbed LTCG. It is not available separately for each minor child, she added.
How is money invested by a parent for a minor taxed?
“It is a gift from a relative, which is not taxable. No specific disclosure of the gift made is required in the ITR,” Sekhri explained.
For capital gains, the purchase price paid for the investment remains the child’s cost of acquisition and is used to calculate the capital gain when the investment is sold.
Parents should also maintain a clear bank trail showing the transfer of funds to the child’s account. If the parent’s income exceeds ₹1 crore and Schedule AL (Assets and Liabilities) is applicable, the investment held in the minor’s name may also need to be disclosed as part of the assets, she added.
How should the minor’s income be reported in the parent’s ITR?
Sekhri explained that parents should check the AIS, TIS, and Form 26AS for both the child’s and parent’s PANs and reconcile investment income with the broker’s tax statements before reporting it in the relevant ITR schedules.
- Schedule SPI: Enter the child’s name, PAN, relationship, nature of income, and amount.
- Schedule CG and Schedule 112A: Report the capital gains, with scrip-wise details.
- Schedule OS: Report dividends, with quarter-wise break-up.
- Schedule EI: Claim the section 10(32) exemption only under the old tax regime. The exemption is up to ₹1,500 per minor child, or the actual clubbed income, whichever is lower.
- Schedule TDS2: Claim TDS on the child’s PAN, since the parent is the person in whose hands the income is ultimately taxable.
- Schedules SI and Part B-TI: Ensure income taxable at special rates is correctly reflected in the total income and tax calculation.
If the minor’s income results in a loss, the parent can club it and set it off against their own income, she added.
Disclaimer: This is only for informational and educational purposes. Please consult a qualified expert for the latest laws and regulations.