Investing in a minor's name: folio rules, tax and age 18

How a minor's folio works

A minor cannot contract in their own right, so a mutual fund folio for a child is held in the child's name and operated by a guardian, usually a parent. The practical rules, which can vary in detail by fund house:

• The minor's details are on the folio (name, date of birth, PAN where held), and the guardian signs and operates it. KYC is needed for the guardian and the child, and proof of the relationship is asked for.
• No joint holders. A minor's folio has the child as the sole holder.
• Payments should come from the minor's account, or a joint account with the guardian, or in some cases from a parent or grandparent with a declaration. Money from an unrelated third party is generally not accepted.
• On redemption the money is paid to the minor's bank account (or the joint account with the guardian), not to the guardian's own account.

Ask your fund house or distributor for its current form, since these requirements get revised.

Tax: the income is usually yours

Opening the folio in the child's name does not move the income out of your tax return. Income that arises to a minor from an investment is generally clubbed with the income of the parent whose income is higher, with a small exemption per child. The worked rules are in clubbing of income: gifts to a spouse and children. Capital gains taxed at the usual equity and debt rates, as described in how SIP redemptions are taxed, simply add to the parent's return. So a minor's folio is a tool for earmarking money for the child, not for saving tax.

When the child turns 18

At majority, the guardian's authority ends. The fund house will freeze the folio, typically blocking new purchases, SIPs and redemptions, until the new adult submits a status-change request with their own KYC, signature and bank account. Do this a few weeks before the birthday, and move any SIP to the child's own mandate. Failing that, instalments can bounce and the SIP can lapse; see pausing or stopping a SIP.

Is it the right wrapper?

A folio in a child's name suits a long goal that is clearly theirs, such as higher education, and where you want the money visibly separate. Remember three things: the child gains control at 18 and the money is theirs, nothing stops them spending it, and you remain the taxpayer until then. If you want the money to stay in your control, invest in your own name and tag it to the goal. The child education calculator sizes the target, and education cost inflation explains why the number is usually bigger than expected. For guaranteed money earmarked for a daughter, see Sukanya Samriddhi.

This post is educational, not financial advice. Folio requirements differ by fund house and change; confirm the current process with the AMC. Tax rules change.