Planning early: mutual fund investments for children
Investing in mutual funds in a child’s name is increasingly being seen as an effective way for parents to set aside longterm savings for education and other major future expenses. However, before choosing this option, investors should
clearly understand the key considerations and implications involved.
- Mutual fund investments can be made in a minor child’s name across all scheme categories, with the child being the sole and first holder and no joint holders allowed.
- The account must be operated by a guardian, who can be either a parent or a court-appointed legal guardian.
- The guardian manages the investment until the child turns 18, after which full control of the account shifts to the child.
Transactions that can be done in a Child’s Mutual Fund Account by the guardian until the child attains majority:
- Systematic Investment Plans (SIPs)
- Systematic transfer plans (STPs)
- Switches
- Redemptions
What happens when child turns 18?
Once the child attains 18 years of age, all ongoing SIPs and STPs are automatically suspended and the guardian’s authority to operate the account ceases. The folio is frozen until the status is updated, after which the individual must complete the required documentation and KYC formalities to operate the account independently.
Account Operation and Documentation Requirements
- To invest in a mutual fund in a child’s name, valid documents must be submitted to establish the child’s age and the guardian’s relationship with the child.
- Accepted documents include the child’s birth certificate, passport copy, or PAN, which confirm the date of birth and whether the guardian is a natural or legal guardian.
- These documents are required at the time of the first investment or while opening the folio.
- Additionally, the guardian must be KYCcompliant to operate the account.
How Taxation Applies to a Child’s Investments Before and After Turning 18
Before the child turns 18:
If the investment is redeemed while the child is still a minor, the capital gains are clubbed with the parent’s taxable income. The parent must then pay tax on these gains at their applicable tax slab rate.
After the child turns 18:
Once the child becomes a major, they are treated as an independent taxpayer. Since most 18-year-olds typically have no other income, they can benefit from the basic exemption limit of ₹4 lakh under the new tax regime. They also receive their own annual exemption of ₹1.25 lakh for long-term capital gains, reducing the tax impact significantly.