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Consider minor children who are citizens of USA, but residents of India. If the Indian citizen resident parent operates custodial accounts (with foreign equities) in their name (they are owners), is income from capital gains and dividends accrued therein taxable in India? What about US?

Note the kiddie tax rule:

Their parent or guardian may have to pay income taxes if the child receives more than $2,500 in investment income in a given year. Income from interest, dividends and capital gains qualify. https://www.nerdwallet.com/article/taxes/kiddie-tax

In this case, parent US tax rate would be 0.

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  • US citizens are subject to tax on worldwide income. The amount of their US income may well be small enough that their personal deductions negate any tax. Whether India will tax it or not, or if there is a tax treaty between India and the US is a separate question.
    – Jon Custer
    Commented Jul 2 at 15:21
  • @JonCuster Added note on kiddie tax to the question.
    – vishvAs vAsuki
    Commented Jul 3 at 4:24

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Since children are Indian tax residents, the income will be taxable in India. First INR 1500 is exempt u/s 32 of Indian Income Tax Act. Any income over & above that is clubbed in the tax return of the parent whose taxable income is higher.

Since children are US citizens, this income will also be taxable to them in US. Generally income above $2500 is taxable at parents rate. If income is less than $12500 parents can elect to include in their own return instead of filing a child return.

You can explore taking a proportionate credit of tax paid in India in the US tax return however if that income is very small tot the total income, the credit eligible will also be very low.

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