Opening a demat account for your minor child can raise questions about who pays tax on the income and where it should be reported. From clubbing rules and capital gains to ITR schedules and exemptions, here’s what parents need to know before filing.
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If you have opened a demat account 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 ITR.
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.
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