Starting to save for a child’s future is a smart move for parents. Many choose to create a fund for their child, especially for higher education expenses. While regular saving is a good plan, considering initial public offerings (IPOs) can also be a way to grow the fund.
IPOs offer a chance to increase the money set aside, providing an additional avenue for parents to secure their child’s financial well-being in the long run.
In this article, we will explain you how you can apply for an IPO in a Minors’s name. You will understand how a minor also apply for any IPO and benefit from it.
Benefits of Applying for an IPO in a Minor’s Name
Investing in a minor’s name comes with several advantages. The funds invested in the child’s name are considered their own when they reach adulthood, providing tax advantages.
This approach ensures that the earnings are separate from the parents’ income, potentially resulting in lower tax obligations for the child.
Additionally, investing in a minor’s name gives a more systematic approach to financial planning for the child’s future needs.
Also Read: What are Non Convertible Debentures and how they are useful?
Applying for an IPO in a Minor’s Name: Step-by-Step Guide
Step 1: Open a Demat Account in the Minor’s Name:
A Demat account is a prerequisite for a minor applying for an IPO. The minor should have a PAN card, which is now accessible even for individuals under 18 with the necessary documents.
The Demat account should be opened in the minor’s name.
Step 2: Link the Minor’s Bank Account with the Parent’s Bank Account:
While minors cannot handle trading accounts, their Demat account needs to be connected to their parent’s trading account to grant access to the stockbroker.
The minor’s bank account must be linked to the Demat account, and KYC documents must be completed for both the minor and the guardian.
Step 3: Submit the IPO Application:
Three methods are available for submitting an IPO application on behalf of a minor:
- Paper application form handed over to the branch.
- Net-banking ASBA IPO form.
- Minors above 15 can apply through UPI through their brokers.
Tax Implications and Financial Considerations
It’s crucial to understand the tax implications associated with investing in a minor’s name. Both short-term and long-term capital gains are applicable for IPO investments in a minor’s name.
During the period when the child is still a minor, any capital gains arising from mutual fund investments are taxed based on the tax bracket of the parent or legal guardian.
Once the child reaches the age of 18 or older, they assume responsibility for paying the capital gains tax. At this stage, considering that the child likely has no other source of income, the tax obligation is usually minimal or non-existent.
What Happens When a Minor Turns 18?
Upon reaching 18 years of age, minors have options regarding their accounts. They can either maintain the existing minor account and create a new one or convert their minor Demat account into a major one by replacing their parents’ or guardians’ information with their own.
Pros and Cons of Investing Money in IPOs for Kids
Pros:
- Tax Benefits: Investing in IPOs for your child can mean less tax. The saved money is considered theirs, leading to lower taxes compared to parents.
- Learn to Save: It helps kids learn to save and invest early, creating good money habits.
- Grow Over Time: IPO investments can grow a lot over the years, building up a fund for the child’s future.
- Understanding Ownership: Having a separate account helps kids understand how to manage money and be responsible.
Cons:
- Complicated Process: Dealing with IPOs for kids involves a lot of steps, like setting up an account, which can be a bit complicated.
- Less Control for Kids: Until kids are 18, parents control the investments, so kids might not get to make decisions.
- Taxes Later: When kids turn 18, they have to deal with taxes on the money, which might be new and a bit of a hassle.
- Some Experts Say No: Some money experts say it might be better for parents to start investing first to avoid extra complications.
Also Read : What is Red Herring Prospectus (RHP) and why it is important in IPO?
Conclusion:
Investing in an IPO in a minor’s name can lay the foundation for a strong financial future for your child. This approach not only offers tax advantages but also instills financial discipline from an early age.
As minors reach adulthood, they gain control over their accounts and can make informed decisions about their financial portfolio.
It’s essential to conduct thorough due diligence before investing in any IPO. Reading the red herring prospectus and understanding the company’s motives for going public are crucial steps in making informed investment decisions.
By starting early and following the proper procedures, parents can contribute significantly to their child’s financial independence and security.
Frequently Asked Questions: How To Apply For An IPO In A Minor’s Name
Q1: Why should I consider applying for an IPO in my child’s name?
Answer: Investing in your child’s name offers potential tax advantages and helps instill financial discipline from an early age. The money saved is considered the child’s own, separate from the parents’ income.
Q2: What are the benefits of applying for an IPO in a minor’s name?
Answer: Applying for an IPO in a minor’s name provides tax advantages and a systematic approach to long-term investment, contributing to the child’s financial future.
Q3: Can minors participate in IPOs, and what are the requirements?
Answer: Yes, minors can participate. They need a Demat account, linked to a parent’s or guardian’s bank account, and the necessary KYC documents.
Q4: How do I submit an IPO application for a minor?
Answer: A minor needs an online Demat account with a PAN number. The application can be submitted via paper form, net-banking ASBA IPO application, or through UPI (for minors over 15).
Q5: What happens to the minor’s account when they turn 18?
Answer: Upon turning 18, minors can maintain the existing account, create a new one, or convert their minor Demat account into a major one by replacing their parents’ or guardians’ information.
Q6: How can IPO investments benefit my child’s financial foundation?
Answer: Investing in IPOs for your child can lay the groundwork for financial independence, aiding in future endeavors like higher education and providing a strong financial base.
Q7: Is it advisable to invest in IPOs for minors according to financial advisors?
Answer: Financial advisors may suggest alternative approaches, emphasizing that parents should initially invest in their names to avoid complexities associated with new accounts and regulations.
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