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Is a minor eligible to apply for shares in an IPO?

Is a minor eligible to apply for shares in an IPO?

A minor is eligible to apply in an IPO if certain conditions are met. Firstly, he needs to have a demat account, for which he needs a PAN card. And under normal circumstances, a minor will not be issued a PAN card because he does not earn.

Is a minor eligible to apply for shares in an IPO? How should one go about this? What will be the tax implications of the profits earned by the minor?

— Kannan

A minor is eligible to apply in an IPO if certain conditions are met. Firstly, he needs to have a demat account. To open a demat account, one needs to have a PAN card. Under normal circumstances, a minor will not be issued a PAN card because he does not earn.

Income from investments and properties in the name of the minor is not considered his independent income but clubbed with the income of his parent. Also, till a minor attains adulthood, he is represented by a parent or guardian in financial matters.

INDEPENDENT INCOME

In the rare instance where a minor uses his own abilities to earn money (in case of child artistes and sportspersons) it is considered his independent income. Only such a person would be issued a PAN card.

IPO APPLICATION

Let us assume that the minor has an independent income and the investment is being done out of that income. While filling up the IPO application, make sure that the names are listed in the same order as in the demat account. If the minor is the primary holder and the guardian the second holder, the same order should be followed in the application.

TAX IMPLICATIONS

There is no special tax rates for minors. The short-term gains (assets held for less than a year) will be taxed at 10% and long-term gains will be tax free. The minor will be eligible for all the deductions and exemptions extended to any other taxpayer.

Financial advisers feel that investing in the name of a minor does not serve any fruitful purpose. According to them, it is better for parents and guardians to invest in their own name and then will the investment to the child. This way they are saved the bother of opening new bank accounts and other legalities.

I wish to invest Rs 50,000 in a scheme that earns me good returns but at low risk. Please suggest a suitable investment option.

— Mrutunjaya Senapati

Investment decisions are defined by an individual’s ability to take risks, the tenure of the investment and the investor’s financials goals.

If you are completely averse to taking risks and your investment tenure is short (6-12 months), opt for a fixed deposit with a bank. The current interest rate is 8-9% a year.

However, if your investment tenure is longer (1-2 years), opt for a good monthly income plan of a mutual fund. The returns tend to be better than fixed deposits because there is a small 20% equity exposure. But there is no guaranteed returns.

If you can take a little risk and have a 2-3 year investment tenure, opt for balanced funds that split the corpus between equities and debt to give about 12-15% returns a year. If the investment is for over three years, go for diversified equity funds.

In the long term, these funds give the best returns. Again, there is no assurance. For best funds in all categories, read our Mutual Fund Special (23 August 2007) and see the Mutual Fund Monitor section in every issue.