Tax rules for demat accounts opened for minor children

A demat account for a minor child can be opened under SEBI rules and must be operated by a guardian, typically the father or mother, until the child turns 18. The income from investments in mutual funds and shares held in such accounts is treated as the child's income but must be clubbed with the parent's income for tax purposes. No separate income tax return (ITR) needs to be filed for the child.

The clubbed income is reported in the parent's ITR-2 or ITR-3 using Schedule SPI, not ITR-1. If the parents are married, the child's income is added to the income of the parent with the higher total income before clubbing. In case of separation or divorce, it is clubbed with the parent who maintains the child. The tax character of the income is preserved: dividends are taxed at the parent's slab rate, short-term capital gains on equity at 20%, and long-term capital gains on equity exceeding Rs 1.25 lakh at 12.5%. The Rs 1.25 lakh exemption applies to the parent's aggregate eligible LTCG, including the child's clubbed gains.

Money gifted by a parent to a minor child for investment is not taxable, but parents must maintain a clear bank trail. For capital gains, the purchase price paid remains the child's cost of acquisition. If the parent's income exceeds Rs 1 crore, the investment held in the minor's name may need to be disclosed in Schedule AL. Losses from the minor's investments can be clubbed and set off against the parent's income.