Educating children today isnâ€™t as easy as it was decades ago. The cost of education is much higher and every parent wants their child to study in premier institutes. Thatâ€™s the reason why many parents start saving for their children as soon as they are born. While making investments in your name for their education seems easy, investing in the childâ€™s name will help make saving easier. Hereâ€™s how you can invest in their names.
Why invest in your childâ€™s name
When you invest in your childâ€™s name, you will not touch those investments in times of need. Theirs will be the last investment that you will liquidate if you are in want of money.
What are the rules regarding minor investments?
If you are investing in mutual funds for your children, note that there canâ€™t be a second holder or a nominee for mutual funds made in a minor childâ€™s name. You need to be registered as a guardian for the investments. If you need to make any changes to this information, you will need to write to the mutual fund house. If you are not directly investing in mutual funds and are having the mutual funds in demat, the demat account has to be in your childâ€™s name. You will need to be the guardian for the demat account.
You will need to complete the know-your-customer (KYC) process for the investments. In case you have set up Systematic Investment Plans (SIP), note that some banks may not allow internet banking for minors. There might be restrictions on use of cheques for the minorâ€™s bank account. It is best to choose a bank that offers good banking services for minor accounts.
Where should you invest?
Even though there are childrenâ€™s mutual fund schemes (read this article for information on them), you should look at many kinds of mutual funds that are available in the market. Childrenâ€™s schemes only help in being disciplined when staying invested because they come with lock-ins. They do not offer any extra benefit. Equity linked saving scheme, that is, tax saving mutual funds in the name of your child can be avoided as they have a three-year lock-in and you cannot claim tax deduction under section 80Cfor the investment.
Mid cap and small cap funds can be considered if you are investing for your childâ€™s education that is at least 5 years away. Thematic funds are best suited for high risk profile investors who are investing for higher returns.
There are fixed-income options such as the Public Provident Fund (PPF) and the Sukanya Samriddhi Yojana (SSY). You can open a PPF account in your childâ€™s name. However, the overall investment including your PPF account can be only Rs. 1,50,000 a year. SSY which is a savings scheme for the girl child below the age of 10. For SSY too, the maximum annual contribution to the scheme is set at Rs 1,50,000. The contributions are eligible for tax deductions under section 80C.
What will happen after your child turns 18?
If you have been making monthly investments using ECS mandates, those will be stopped. Your investments will be frozen. You will need to get a Permanent Account Number (PAN) in your childâ€™s name. You will need to complete the KYC norms. Once your bank removes the minor status for the child, you can ask the mutual fund house to change the investments to your major childâ€™s name. You will need to provide them with documents such as your childâ€™s signature, bank account details and other documents. You need to follow up with each of the fund houses to get this done. Once the mutual fund folio is in your major childâ€™s name, you will not have control over those investments. Your child will be in charge of those investments.
Do you need to pay tax?
When you sell the investments, the money will get credited to the childâ€™s bank account. The capital gains earned on the investments will be clubbed to your income and will be taxed at the tax rate that is applicable to you. If both you and your spouse are earning, then the gains will be clubbed with the parent whose income is higher. There is an advantage when the income gets clubbed. When your income includes the income from your minor child, you can claim an exemption under Section 10 (32). This can be up to Rs. 1,500 or the clubbed income, whichever is less. However, if the investments are sold after the child turns 18, the tax liability will be on the child.
Note that for special children, the capital gains and income earned on the investments will not be clubbed with the parentsâ€™ income if you invest in the childâ€™s name. The clubbing provisions under Section 64 of the Income Tax Act, 1961 specifically excludes â€˜special child suffering from any disability as defined under Section 80U of the Actâ€™.
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