Wealth creation for minors

Investment in growth funds during minor years can build healthy capital, lawfully saving tax burden on parents

- JIGAR MUKESH PATEL

A major tax block in capital formation for minors is posed by the clubbing provisions of Section 64(1A) of the Income-tax Act, which provide that in computing the total income of an individual, there shall be included all such income as arises or accrues to his/her minor child.

Planning for a minor child's long-term financial needs, such as higher education etc. calls for an investment strategy that can meaningfully overtake the combined impact of tax and inflation.

Investing in growth funds - power of compounding with tax shelter

Investment in units of growth-based Mutual Funds can prove to be a useful option while planning capital formation for minors. Growth funds leverage the power of compounding over a long-term investment horizon. They reinvest earnings of the fund in the form of dividends or gains, instead of periodically distributing income to its unit holders.

Incidence of tax in the hands of the investor arises on actual receipt or accrual of income. In case of investment in growth funds, taxable capital gains arise only at the point of redemption, thus offering a tax shelter until the appreciation is actually realized.