Minor Account Investing
Minor account investing refers to the practice of opening financial accounts and making investments in the name of a child below 18 years of age in India, with the parent or guardian acting as the custodian, encompassing bank accounts, mutual funds in a minor's name, Sukanya Samriddhi Yojana, and demat accounts.
Investing in a child's name is both a goal-funding strategy (building a corpus for education or marriage) and a potential tax planning tool, though the tax benefit is limited by the clubbing provisions of the Income Tax Act.
Bank accounts for minors can be opened under two types: a guardian-operated account (where the parent transacts on the minor's behalf) and a minor-operated account (for children above 10 who can independently operate the account up to a transaction limit). Upon turning 18, the minor must complete full KYC and convert the account to an individual account.
Mutual funds in a minor's name are permitted under SEBI's regulations. The SIP or lump-sum investment is made through the guardian's bank account, but the folio is held in the child's name. AMFI guidelines require that the minor's folio is frozen for further investments on the minor's 18th birthday until full KYC (including a new bank account in the minor's own name) is submitted. Returns earned in a minor's folio are clubbed with the parent's income under Section 64(1A) of the Income Tax Act, except for an annual exemption of Rs 1,500 per child (for up to two children). This substantially limits the tax efficiency of this route.
Sukanya Samriddhi Yojana (SSY) remains the most tax-efficient investment vehicle for a girl child: contributions are eligible for Section 80C deduction, interest is tax-free, and maturity proceeds are exempt. The account matures when the girl child turns 21, with partial withdrawal of up to 50% permitted after age 18 for higher education.
Demat accounts for minors are permissible. Equity or equity fund investments in a minor's demat or mutual fund account benefit from long-term compounding and the typically long investment horizon (10–15 years to adulthood). However, since income is clubbed with the guardian's income, the direct tax benefit is minimal — the primary rationale is goal-earmarking and disciplined corpus building.