Securing their child's future is the number one priority of all parents, and they are on the constant lookout for saving and investment opportunities. If you wish to give your child a head-start, you must know about the IPO in a minor account.
You can invest in an IPO in your child’s name so they are financially secure and prepared to embark on their financial journey once they turn 18. This method promotes long-term wealth creation and offers potential tax benefits under Indian law.
An IPO investment for a minor creates a solid financial foundation for them. As the investment grows, your child will witness how their savings can be appreciated through capital gains and dividends.
In this article, we explain how this strategic choice can be a smart move for securing your child's financial future.
Initial public offerings: What makes them important
An initial public offering (IPO) allows a company to transition from private to public, opening up opportunities to raise capital without the burden of debt. Going public increases a company's visibility, enhancing its credibility and attracting potential investors and customers. It also establishes a market value based on public perception and demand.
Furthermore, it is a valuable investment opportunity as it lets you get a stake in the company. You can appreciate your savings along with the gains received on the investment. It helps you create secure funding for your children, which will grow with time.
Process of applying for an IPO in a minor’s name
To apply for an IPO in a minor's name, you'll need to follow these steps:
1. Open a demat account
The first step is to open a Demat account in the minor's name. This will require a PAN card for the minor, which can be obtained with necessary documents like Aadhaar.
2. Link bank accounts
The minor's Demat account must be linked to one of the parent's bank accounts. This allows for the smooth transfer of funds and the application process. Both the minor and the parent will need to complete KYC formalities.
3. Submit the IPO application:
You can submit the IPO application through one of the following methods:
- Online: Use the ASBA (Application Supported by Blocked Amount) facility through your broker's net banking platform.
- Offline: Submit a physical application form to your broker or bank.
- UPI: For minors above 15, you can use UPI to apply through your broker.
By following these steps, you can successfully apply for an IPO on behalf of a minor.
Benefits of applying for an IPO in a minor's name
Applying for an IPO in a minor’s name offers several unique benefits that can contribute to a child’s financial future:
- Long-term growth: Investing early in an IPO allows the funds to grow over time, potentially increasing in value by the time the child reaches adulthood.
- Educational opportunity: This process provides a practical lesson in financial literacy, introducing concepts of investing, market dynamics, and the importance of saving.
- Tax benefits: Investments in a minor's name are taxed in the child’s tax bracket, which is typically lower, offering significant tax advantages under Indian law.
- Financial independence: These investments can serve as a foundation for financial independence as minors learn to manage and grow their investments responsibly.
- Capital appreciation and dividends: IPOs are also a good investment because of the potential for capital appreciation over time and the possibility of earning dividends, both of which can significantly enhance the value of the initial investment.
Applying for an IPO
Ensure that the name of the minor is listed in the same order in the SME IPO application as it is listed in the demat account. Additionally, the application must be filled out in the same order in case the minor is the primary holder and the guardian is the secondary holder.
This makes the process smooth and avoids any confusion. As a result, by following the right procedure, you can fast-forward your IPO application.
Tax implications
When you apply for an IPO in a minor’s account, there is also a tax benefit. The minor’s income remains theirs till they reach the age of 18. As a result, the money is not added to the income of the guardians or the parents, which is taxable. Therefore, there can be a tax benefit that comes from launching an IPO in the name of the minor.
Since the minor does not have any other source of income, the gains made through IPO are not usually taxable.
Requirements for making an IPO bid
The minor must meet certain requirements to make an IPO bid. It is necessary for them to have a demat account since all the share transactions will be made from this account. To open a demat account, you must have a bank account and a PAN card.
While certain brokers allow the opening of a demat account in the name of the minor, others do not. In this case, the demat account of the parent or the guardian can be used. Make sure to have the demat account in place timely before launching an IPO.
Lastly, you must fill out 2 KYC forms, one for the minor and the other for the parent or guardian.
How do I submit a minor's initial public offering (IPO) application
The minor’s demat account must be connected to the guardian's trading account, and both of the KYC documents must be complete. As soon as this process is done, here is the answer to how to apply for an IPO in a minor’s account.
There are three methods available, including:
ASBA IPO net banking application
This is the easiest way to submit an IPO application. However, keep in mind that only limited banks allow you to submit the IPO application through net banking. The primary account holder for the demat account and the bank account must be the same in this case.
Paper-based IPO application
Another option to submit the IPO application is via a paper-based application. This option must be available in case the bank does not offer online IPO application submission for minors.
UPI IPO application
This option is specifically for minors over 15 years. They can create a UPI ID and use it for submitting the IPO application. The maximum limit approved for this method is Rs. 5 lakhs worth of shares.
What happens when a minor reaches 18
As soon as the minor turns 18, they can either decide to update their information on the account, close the account or start over again. The minors can keep the minor account open and create another account to transfer their shares into the new account.
The other option is to convert the same account into a major account by substituting their documents with those of their parent or guardian. Once they have a demat account, trading account, and PAN card in their name, their account operates without the need for a parent or guardian.
Conclusion
The process of launching an IPO in the name of a minor can help your child have ready assets when they grow old to be used for education and other purposes. It also helps you save tax on capital gains.
