Sebi allows mutual fund investment in child's name from parent's bank account: All you need to know

Starting a mutual fund for your child no longer requires the cumbersome process of opening a bank account in their name. According to a recent circular released by the Securities Exchange Board of India (Sebi) on May 12, 2023, investments can now also be made from the bank account of the parent or legal guardian of the minor, or a joint account of the minor with a parent or legal guardian. This new rule will be effective from June 15, 2023.

The recent change in rules is a positive development as it simplifies the investment process. Moreover, having a mutual fund in a child's name provides a stronger sense of commitment for parents to continue the investment. On the other hand, if the investment is in an individual's name, there is a higher probability of withdrawals during emergencies, for purchasing luxury items like the iPhone 14 Pro, or during market downturns. 

However, it's important to note that the redemption proceeds of the investment will still be credited to the minor's bank account exclusively when funds are withdrawn. This means you might not have a bank account in the name of the child while opening a MF scheme but you will need the one at the time of withdrawing the amount with complete KYC formalities.

Another point to keep in mind is the taxability of gains from such investments. "There are two aspects of it. If the investment is withdrawn before the child turns 18 then the capital gain becomes taxable in the hands of the parent under clubbing provisions of the Income Tax Act. If the investment is redeemed after 18 years of age, then in this case capital gains can be taxed in the hands of children provided the original investment is considered as a gift from the parent," explained Sujit Bangar - Founder - TaxBuddy.com. 

Source Link: https://www.businesstoday.in/amp/personal-finance/investment/story/sebi-allows-mutual-fund-investment-in-childs-name-from-parents-bank-account-all-you-need-to-know-381490-2023-05-16

Website Link: https://www.taxbuddy.com/

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