Setting Up Accounts
Opening a mutual fund account for a minor in India requires a guardian to act on their behalf. The parent or legal guardian is the primary account holder,
managing the investments until the child reaches adulthood. The process typically involves submitting Know Your Customer (KYC) documents for both the minor and the guardian. The guardian is responsible for making investment decisions and managing the account until the child turns 18. This includes selecting the funds, monitoring the portfolio, and handling any transactions. It's essential to understand that the minor is the ultimate beneficiary of the investments, with the guardian acting as a trustee for their benefit, and the funds are accessible to the child upon attaining majority. Proper documentation and adherence to regulatory guidelines are crucial throughout this process.
Key Rules to Know
Several crucial rules govern mutual fund investments for minors in India. Firstly, the guardian must have a Demat account to facilitate these investments. Investments are generally made through a guardian, acting in the child's best interest. Another essential rule is that the guardian must provide all necessary details, as per the Know Your Customer (KYC) guidelines. Also, the guardian should be aware that the minor cannot directly transact within the account; all transactions are facilitated by the guardian. Moreover, changes to the guardian require a specific procedure, and the new guardian must also fulfill KYC regulations. It's also vital to select funds that align with the child's long-term financial goals and risk tolerance. Finally, it's wise to review and adjust the investment strategy regularly, ensuring that it remains suitable over time.
Tax Implications Explained
Investing in mutual funds for a minor has significant tax implications under Indian tax laws. Any income earned, such as dividends or capital gains, is taxable. However, the income earned is clubbed with the income of the parent or guardian. This implies that the total income gets added to the parent's income, and it is taxed at the parent's income tax slab rate. There is an exemption available. Under Section 10(32) of the Income Tax Act, a parent can claim an exemption of up to Rs 1,500 per child per year. This means that if the income from the minor's investments is less than or equal to Rs 1,500, it can be exempt from tax. It's crucial to declare all earnings in the tax return and maintain appropriate documentation. Seeking advice from a tax professional ensures compliance with all regulations and proper tax planning.
