Tax implications of gifting funds to minor daughter to invest in US stocks | Mint

I have gifted some money to my daughter when she turned 16. We both are residents. I have set up her custodial account in US for investment in Nasdaq-listed stocks from this gifted money. I would like to understand the potential tax implications in India on this. 

-Name withheld on request

As per FEMA or Foreign Exchange Management Act regulations, under the Liberalized Remittance Scheme (LRS) of the Reserve Bank of India, resident individuals can remit up to $250,000 per financial year for various permissible capital and current account transactions. The LRS allows a resident individual to make investments in foreign securities. This scheme is also applicable to minors apart from their parents. Consequently, your daughter, who is a minor and a resident of India, is permitted to invest in US securities under LRS. 

As per Indian income tax provisions, any remittance made under LRS for the purpose of purchasing foreign securities is subject to tax collected at source (TCS) at the rate of 20% provided the aggregate amount of investment is above the prescribed threshold. The present threshold is ₹7 lakh, which is proposed under Finance Bill 2025 to be increased to ₹10 lakh. In this case, since the remittance will be made under the LRS limit of your minor daughter, the TCS liability will arise in her name. Consequently, the tax will be collected and reported against her PAN. 

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If the US securities generate any income, such income will be clubbed in the hands of the parent whose total income in India is greater (irrespective of whether such parent would have acted as the guardian for opening the custodial account). Accordingly, the parent (in whose hands the daughter’s income is clubbed) will have to report the income in his/her Income Tax Return (ITR) in India. The parent can claim an exemption of ₹1,500 per child per year and also a foreign tax credit (FTC) against taxes borne in the US against the income, if any.

Also, under Indian income tax law, a resident individual who holds any foreign assets is mandated to file ITR, irrespective of their total income. An ITR can only be filed after registering the PAN on the income tax portal. However, in the case of minors, the income tax portal does not permit PAN registration unless the minor has earned professional income from their own skill, talent, or specialized knowledge such as earnings from acting, singing, sports, etc. 

If your minor daughter holds foreign assets (i.e. foreign securities) but does not have any professional income, she will not be able to file her individual ITR due to the restrictions on the income tax portal. Under such a situation, the foreign assets held in her name and the TCS collected on her PAN can instead be reported and claimed in the parent’s ITR.

Harshal Bhuta is partner at P. R. Bhuta & Co. CAs