Investing in your child’s name can help solve a lot of financial woes in future. Such investments can come handy in variety of situations.

For instance, when your child grows up and goes for higher education, you will have funds to back him or her up. Or, when you plan to organize a grand wedding for your daughter, you won’t be bogged down by skyrocketing prices. Your investments over the years will help cover such expenses.

Financial advisors say the best time to start investing for your child is probably from the time of childbirth itself. In case of delay, you should start investing as early as possible.

Bank account to invest for child’s future

Parents can invest for their children through their own bank accounts. They can also open a separate minor bank account in the name of their children. One of the parents has to become a joint accountholder of the minor account. In this case, children become eligible to handle their account once they turn 18.

Parents can use the minor account to deposit cash gifts given to the child. Also, parents need to open a minor bank account for routing investments through Demat accounts.

Best options to invest for child’s future

Depending on the child’s future goals, parents can invest either in guaranteed government savings schemes, Gold or market-linked instruments such as mutual funds and stocks. It is better to avoid insurance products as they deliver low returns in the long-run.

Government-backed schemes

There are two Government-backed savings schemes that offer superior benefits if investing in the name of children for a long term. The Government guarantees returns from these schemes, which is not the case with market-linked instruments

• Sukanya Samriddhi Yojana (SSY)

SSY is one of the most popular schemes to save money for the girl child. The scheme allows investing up to Rs 1.5 lakh per year. Parents can make deposits in this scheme for 15 years. The account matures after 21 years from the date of opening. However, the account is closed if the girl marries before the age of 21. Currently, the Government is offering 8.2% interest on this scheme, which also enjoys “E-E-E” tax benefits (read more details here)

Public Provident Fund (PPF)

Parents can open PPF accounts in the name of their children. Like SSY, PPF also allows investing up to Rs 1.5 lakh per year. It enjoys “E-E-E” tax status and matures after 15 years. However, the PPF account can be extended in blocks of 5 years. After turning 18, the child can decide whether to continue the PPF account or close it.

Note: Parents can claim deduction up to Rs 1.5 lakh under Section 80C if investing in PPF or SSY accounts of their children.

Also Read: 5 Best Last-Minute Tax Saving Investment Schemes for FY 2023-24

Gold Investment

Parents can either buy physical gold or explore digital options. The best digital gold option available as of now is Sovereign Gold Bond.

As per RBI, a guardian can apply for SGB on behalf of the minor. SGB offers benefits such as 2.5% annual interest, exemption from capital gains tax on redemption and indexation benefits to long term capital gains arising to any person on transfer of the bonds.

However, interest on sovereign gold bonds is subject to tax as per income tax rules.

Market-linked instruments

Mutual Funds/stocks

Parents can invest in mutual funds on behalf of their children. They can invest in minor mutual fund accounts through their own bank accounts. However, the amount on redemption will be transferred to minor’s bank account only.

For making the most of mutual fund investments on behalf of children, parents should consult SEBI-registered investment advisors.

When it comes to stocks, parents cannot buy shares through a minor’s Demat account. However, they can transfer stocks as gift to such Demat accounts.

For Demat account opening in the name of the child, Aadhaar and PAN are required.

How investments in child’s name are taxed

Government schemes like PPF and SSY are completely tax-free. In case of mutual funds, capital gains is clubbed with the income of the parents. A tax exemption of Rs 1500 is available to parents in case of clubbing.

However, if the redemption is done after the child turns 18 then the capital gains are taxed in child’s PAN. So to make the most of this provision, parents may avoid investing in interest generating instruments such as fixed deposits.

Additional Tips

• For identity and address proof, parents need to submit PAN and Aadhaar of the child.
• You can get an Aadhaar ID of a newborn child by applying at Aadhaar centers along with the birth certificate.
• At the time of enrolment of a new born, only the photo is taken. Biometrics of the child is captured when s/he turns 5.
• Parents can also get a PAN card in the name of the child by submitting form 49A to NSDL along with documents to establish address, date of birth, and identity.

Want to learn more about how to start investing for future financial goals? The 1% Club can help you.

Disclaimer: The above content is for informational purposes only. Please consult your financial advisor before investing.