Jigar M. Patel
International Tax Attorney
A major tax block in capital formation for minors is posed by the clubbing provisions of Section 64(1A) of the Income-tax Act, which provide that in computing the total income of an individual, there shall be included all such income as arises or accrues to his/her minor child.
Planning for a minor child’s long-term financial needs, such as higher education etc. calls for an investment strategy that can meaningfully overtake the combined impact of tax and inflation.
Investing in Growth Funds – Power of Compounding with Tax Shelter
Investment in units of growth-based Mutual Funds can prove to be a useful option while planning capital formation for minors. Growth funds leverage the power of compounding over a long-term investment horizon. They reinvest earnings of the fund in the form of dividends or gains, instead of periodically distributing income to its unit holders.
Incidence of tax in the hands of the investor arises on actual receipt or accrual of income. In case of investment in growth funds, taxable capital gains arise only at the point of redemption, thus offering a tax shelter until the appreciation is actually realized.
Strategic Investment Planning for Minors
Investing in the name of a minor in suitable growth funds can prove to be an effective strategy to blunt the impact of the clubbing provisions under the Income-tax Act. The parent should ensure that the investment is allowed to grow during the minority of the child. There being neither any receipt nor accrual of income in this case, there is no consequential tax impact, leading to any additional burden for the parents.
In the investment parlance, lawful deferment of tax, resulting in healthy tax saving, effectively means an added return of investment over a period of time.
Gift of Mutual Funds to a Minor
Investment in mutual funds for a minor can either be done through a gift of money and subsequent investment into units or planning a direct gift of units to the credit of the minor.
Gifting mutual fund units is primarily allowed through Demat (Dematerialized) mode. Demat account for a minor can be opened, with either parent as guardian and off-market transfer of units from parent’s account by way of gift into the minor’s demat account can be smoothly done by submitting the requisite KYC documentation.
SEBI eases Mutual Fund Transfers
The good news is that the Securities and Exchange Board of India (SEBI) on October 29, 2025, has introduced a much-awaited reform, allowing mutual fund investors to transfer units without the need for a demat account.
The above change is now meaningfully relevant in diverse scenarios as it simplifies processes like inheritance, gifting units and updating joint holders across most mutual fund schemes. This provision has been made applicable for all mutual fund schemes, except Exchange Traded Funds (ETFs) and solution-oriented schemes like retirement and children’s funds.
Enabling mutual fund transfers without a Demat account will help streamline key investor actions in cases such as inheritance, gifting and adding joint holders, thus bringing greater accessibility and operational ease for investors.
Tax-free Gifts in the hands of the Minor
It also needs to be borne in mind that planning of wealth creation for a minor can be strategically arranged, not only through gifts from parents, but also any other ‘specified relatives’ within the meaning of Section 56(2) of the Income-tax Act. This would include grandparents, uncles or aunts, whose gifts can also help build the minor’s investment portfolio, in view of the fact that there is no ceiling on the amount of such tax-free gifts.
Investment in growth based mutual funds can be structured through diverse modes, such as, lump sum investment, Systematic Investment Plan (SIP) or Systematic Transfer Plan (STP).
