By ipomarket.in Editorial Team · Last reviewed: 2026-09-01
Disclaimer: This article is for informational purposes only and does not constitute investment advice. IPO investments are subject to market risks. Please read the offer document carefully and consult a SEBI-registered investment advisor before investing.
A common question among Indian parents is whether opening a demat account in a child's name and applying for IPOs there can save tax. The short answer: not in the way many people expect. The income does not sit untouched in the child's hands until they turn 18. Indian tax law has a specific rule for exactly this situation, and understanding it before you set up a minor account will save you from an unpleasant surprise at ITR time.
This guide walks through the tax treatment, the regulatory setup for minor demat accounts, worked examples, and what happens when the child turns 18.
Can a minor apply for an IPO at all?
Yes. A minor (anyone below 18 years of age) can be allotted IPO shares in India, but only through a demat account opened in the minor's name and operated by a parent or a court-appointed guardian. A few practical points from the regulatory framework:
- The account is a single-holder minor demat account. The guardian operates it but is not a joint holder.
- A PAN is mandatory even for the minor applicant.
- The minor cannot access or manage the shares directly until they turn 18.
IPOs today are governed by the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 — usually shortened to the ICDR Regulations. These set out how applications, allotment and eligibility work. If you want a refresher on the mechanics of how shares are distributed, see our explainer on the IPO allotment process.
The rule that matters most: Section 64(1A)
Here is the core of the tax treatment, and it is the part most "tax benefit" marketing conveniently skips.
Under Section 64(1A) of the Income Tax Act, 1961, any income earned by a minor — including capital gains from selling IPO shares — is clubbed with the income of the parent whose total income is higher (measured before adding the minor's income). That combined income is then taxed at the parent's applicable slab rate.
In plain terms: the gains do not enjoy a separate, low tax bracket just because the demat account carries a child's name. They are treated as the parent's income.
The small relief: Section 10(32)
There is one modest concession. Under Section 10(32), the parent can claim an exemption of up to ₹1,500 per child per financial year, for a maximum of two children, on the income being clubbed. It is genuine relief, but at ₹1,500 it is small and does not change the overall picture.
When is the tax actually triggered?
No tax arises at the time you apply for or receive IPO shares. Capital gains tax is a tax on sale or transfer, not on holding. So allotment day itself is a non-event for tax purposes.
The tax event happens when the shares are sold. The rate then depends on the holding period:
- Short-term capital gains (STCG) — shares sold within 12 months of acquisition — taxed at 20%.
- Long-term capital gains (LTCG) — shares held longer than 12 months — taxed at 12.5% on gains above ₹1.25 lakh.
These rates apply to all listed-share investors, not just minors. The difference for a minor account is only whose income the gain is added to. For a fuller treatment of how listing gains are taxed, our guide on IPO gains and the ₹1.25 lakh LTCG exemption covers the arithmetic in detail.
Worked examples
Examples make clubbing concrete. The figures below are illustrations, not projections.
Example 1 — Higher-slab parent
Suppose the shares held in the minor's account are sold and the gain works out to ₹2,00,000, and the father is the higher earner in the 20% slab. That ₹2,00,000 gets added to the father's taxable income. After the ₹1,500 Section 10(32) exemption, roughly ₹1,98,500 is taxed at his slab rate. The tax is paid by the father, not the child.
Example 2 — 30% slab parent
If the higher-earning parent is in the 30% bracket and the minor's IPO gain is ₹1,00,000, the amount is clubbed with the parent's income and taxed at 30% (after the ₹1,500 exemption). There is no lower "child rate" available here.
Example 3 — Lower-slab parent
If the higher earner is in the 5% slab, the gain is clubbed and taxed at 5%. A marginal advantage can exist in this case, but it comes from the parent's own low slab — not from the money being "the child's" or "tax-free".
Note that clubbing works both ways. If the minor's investments produce a loss, that too flows into the parent's return, subject to the usual capital-gains set-off rules.
The "tax-free" claim you should be sceptical about
Some brokerage marketing frames minor accounts as "tax-advantaged" or suggests the child's gains stay untaxed until 18. This contradicts Section 64(1A). Because the clubbing provision always applies while the child is a minor, the gains are not taxed in a separate low bracket, and they are certainly not exempt.
Regulatory-facing guidance, including recent 2026 commentary, leans the other way — emphasising compliance rather than treating minor accounts as a loophole. SEBI also monitors multiple applications tied to a single PAN. Treat any "save tax with a kid's demat" pitch as marketing, and verify it against the Act or with a chartered accountant. If you are trying to separate genuine information from promotional framing more generally, our note on sponsored IPO content versus independent reviews is worth a read.
What changes when the child turns 18
Once the child turns 18, the demat account is transferred to their full control, and gains earned after that point are taxed in their own name — clubbing no longer applies. If the child turns 18 during a financial year, tax treatment generally shifts to being assessed in the child's own hands from that point; the exact mechanics for a mid-year birthday are worth confirming with a tax professional, as they depend on how the income is apportioned.
Documentation and filing — the honest gaps
A few practical areas are less cleanly documented than the tax rule itself, so treat these as "check before you act":
- Guardianship proof: Brokerages typically ask for the child's birth certificate and, where relevant, a court order. We did not find a single consolidated SEBI circular prescribing the exact documentation standard, so requirements can vary by broker.
- ITR reporting: In practice the clubbed income is reported under the parent's PAN and return; minors usually do not file a separate ITR. Confirm the correct schedule with your CA.
- Account status: Some 2026 broker guidance mentions account restrictions if a minor account is not updated on time. This reads as broker-specific process rather than a regulatory penalty.
Given these grey areas and the fact that clubbing interacts with the rest of your household's income, a family with meaningful IPO activity across accounts should get a chartered accountant to review the setup rather than rely on generic online summaries.
FAQ
Are IPO gains in a minor's demat account tax-free?
No. Under Section 64(1A) of the Income Tax Act, gains from a minor's investments are clubbed with the income of the higher-earning parent and taxed at that parent's slab rate. The only relief is a small exemption of up to ₹1,500 per child per year under Section 10(32).
Do I pay tax when the IPO shares are allotted to my child?
No. There is no tax at subscription or allotment. Capital gains tax applies only when the shares are sold — STCG at 20% if sold within 12 months, or LTCG at 12.5% on gains above ₹1.25 lakh if held longer.
Can a minor apply for an IPO without a PAN?
No. A PAN is mandatory for the minor applicant, and the application must go through a single-holder demat account opened in the minor's name and operated by a parent or court-appointed guardian.
Does the tax treatment change when my child turns 18?
Yes. Once the child turns 18, the account moves to their control and future gains are taxed in their own name, so clubbing stops. For a birthday that falls mid-year, confirm the apportionment with a tax adviser.
Is opening an IPO account in a child's name a way to reduce tax?
Not really. Because clubbing always applies while the child is a minor, there is no separate low "child bracket". Any advantage comes only if the higher-earning parent already sits in a low slab, and even then it is marginal, not a loophole.
The bottom line
Applying for IPOs in a minor's name is legal and straightforward on the regulatory side — a single-holder demat account, a PAN and guardian operation. But it is not a tax shelter. Section 64(1A) clubs the child's gains with the higher-earning parent's income, the ₹1,500 Section 10(32) exemption is modest, and tax is triggered only on sale at the standard STCG and LTCG rates. Set expectations accordingly, and speak to a SEBI-registered adviser or a chartered accountant before building any strategy around a minor account.
Last reviewed: 2026-09-01.