When it comes to child investment in India, several parents contemplate opening a demat account for minors. Such accounts help in systematic wealth creation for future needs of the child, be it for education, marriage, or some other long-term goal. Inversely, investors sometimes see a possibility of tax planning advantages with these accounts. While investing in the name of a minor is one way, many rules and realities are seldom highlighted. A clear understanding of these is vital before any decision.
Demat Account for Minors: The Basics
A demat account for minors functions almost like the regular demat accounts, but some differences exist. A minor, not being of age, is not legally allowed to operate financial accounts on his own. Thus, a parent or legal guardian manages the account on behalf of a minor. He/she takes all essential decisions relating to the account, including opening the account, conducting transactions, and abiding by rules.
Key facts in this regard are the following:
The account is opened in the minor's name, while the guardian acts as the operator.
A minor cannot trade in derivatives, intraday, or commodities. The account is allowed only for delivery-based transactions, such as equity delivery and mutual funds.
After turning 18, the minor's account will be transformed into a regular demat account, and the child will exploit it fully.
This structure thus enables parents to get into the act early and lay a financial foundation for the child.
Why Low Brokerage on Demat Account Matters
Many parents are concerned about the cost when spending time deciding on the platform for investments. Lesser brokerage for the demat account, therefore, lessens the burden of transaction costs, especially if investments are being made in a systematic manner for a long time. Since minor accounts are likely to adopt a long-term perspective for wealth creation via equity shares or mutual funds, it pays to be efficient on the brokerage front.
Existence of services like e-statements, nominee registration, and trouble-free conversion of the account when the minor child attains the age of 18.
Simply opting for an account with the lowest brokerage may not be the most rational method if its service level is poor or if there is no support for compliance.
What Is the Tax Perspective: Can Minor’s Demat Be Used for Tax Planning?
This question is often a subject of intrigue amongst parents: Can a minor's demat be used for tax planning? On the face of it, it seems that investment in the name of a minor should help the family to spread income and thereby reduce overall tax burden. However, the Income Tax Act has gone into this in detail to prevent misuse.
Clubbing of Income: As per Clause 64(1A) of the Income Tax Act, all income accrued to a minor (except in specified instances) is to be clubbed with the income of the parent who earns higher income. For example, amounts invested in the shares via a minor's account would be taxed as capital gains income of the parent who controls that income.
Exemption Limit: With regard to this clubbed income, parents can claim benefits up to ₹1,500 per child year-on-year. This is a negligible respite, but not a significant tax-saving avenue.
Exceptions: If the minor is physically or mentally challenged or the income arises due to the minor’s own skill, talent, or specialized knowledge, then the clubbing rule would not be applicable and the income will be taxed in the minor's hands.
What Experts Don't Advertise
No Direct Control by Minor: Sometimes, parents assume their child can engage in trading or investment decisions. In reality, the account is fully controlled by the guardian until the child turns 18.
Tax Planning Limitations: As discussed, the tax benefit from the minor's account remains minimal because of clubbing provisions. Some investors find this out only after
Limited Investment Options: A minor's demat account cannot be used for high-risk players like intraday or derivatives. Though this safeguards the child, it also limits the flexibility of parents exploring diverse strategies.
Operational Challenges: The account conversion would involve paperwork and KYC compliance when the child turns 18. Not that it is dastardly hard, but it demands its share of focus and documentation.
Brokerage is Just One Factor: Low brokerage is the one strong selling point for the demat account, but if maintenance charges and transaction fees aren't carefully evaluated, they could easily eat up the savings.
Practical Consideration for Parents
Look at a minor's demat as a long-term investment instrument rather than a tax-saving one.
Invest in equities and mutual funds aligned well with a child's distant investment horizon.
Compare platforms on considerations beyond just brokerage such as overall service, transparency, and ease of account conversion.
Keep documents updated, especially on nomination and KYC details, to avoid future hassles.
Conclusion
A demat account for minors is a valuable tool for parents who want to start early in building wealth for their child. Choosing a demat account with low brokerage can help reduce long-term costs, but brokerage alone should not be the deciding factor.
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