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Planning finances and investing in children’s future is an important responsibility that every parent must undertake. While education, marriage, and other goals may seem far away when the child is young, costs can escalate rapidly in the future. Investing early can be advantageous as it allows your money to grow through the power of compounding. Are you interested in investing in your child’s future financial needs in India?
In this article, we will analyse the various investment options available for minor children in India, the tax implications, and other factors to consider before investing on behalf of your minor child.
As per the Indian Majority Act 1875, a minor is defined as a person who has not completed 18 years of age. An exception is in the case of a married minor girl– she attains majority at 15 years.
On the other hand, a major is a person who has completed 18 years of age as per the law.
Therefore, in managing investments, anyone below 18 years of age is considered a minor, and a guardian must manage investments. Parents are natural guardians, while court-appointed guardians may be required in certain specific situations.
When investing in a minor child, the first requirement is completing KYC formalities. As per RBI guidelines, a minor of 10 years or older must have valid KYC documents, such as identity and address proof, for making investments.
Additionally, keep these aspects in mind for managing investments of your minor child:
1. Open a separate bank account in the minor’s name with either parent as the guardian. This account will be used to receive investment proceeds like dividends, interest, and redemption amounts.
2. Investment payments must only be made from the guardian’s bank account.
3. Any income earned on the minor’s investments is clubbed with the parent’s income, whose income is higher for that year.
4. Investments have to be held by the guardian in a fiduciary capacity on behalf of the minor.
5. All communication and transactions related to the minor’s investments must clearly specify the guardian’s name and the minor’s.
6. When the minor turns 18, the account must be changed to a major account by providing the newly major person’s PAN, KYC documents, and signature in bank records.
Some key investment options for accumulating funds for your minor child are discussed next:
Investing in direct stocks can help create a share portfolio for your child to meet long-term goals. The key steps are:
Investing in mutual funds via SIPs is a disciplined way to accumulate funds for your child over the long term. Here is the process to follow:
Bank FDs are a safe investment avenue that can help accumulate a corpus for the short-term financial needs of your minor child. Follow this process for investing in FDs for minors:
Post office savings schemes like Sukanya Samriddhi Yojana, Public Provident Fund, Post Office MIS, National Savings Certificate, and Kisan Vikas Patra can also be considered for accumulating funds for your girl child or minor boy.
For instance, the Sukanya Samriddhi Yojana is a good option for investing in your girl child’s future needs. Follow this process:
Purchasing real estate like land or an apartment in your minor child’s name can build an asset and also provide rental income. Here is the process to follow:
Building exposure to gold via sovereign gold bonds (SGBs), gold ETFs, digital gold, etc, can hedge against inflation and also offer stability to the overall portfolio:
A life insurance policy helps ensure financial stability for the child in case of any eventuality to parents. Here is the process for the minor:
If you have earned long-term capital gains on the sale of property or shares, you can invest the gains by purchasing Capital Gains Savings Bonds in the name of your minor child within 6 months of sale:
An important aspect of managing any minor’s investment account is converting its status to a major account once the minor turns 18. Here is the procedure for this transition:
1. Collect KYC documents of the new adult-like PAN card, Aadhaar, mobile number verification etc.
2. Submit a request letter to relevant entities like post office branches, stockbrokers, mutual fund houses, etc, requesting a change of account status from minor to major.
3. Append the new major person’s signature, verified by the bank or guardian, in account records and KYC documents.
4. Once the account change request is approved, it becomes a regular savings/Demat/trading account operated directly by the erstwhile minor. A new checkbook facility is also enabled.
5. If you had opened a joint bank account with a minor child under guardianship, now you can submit a request to remove your name. The account can continue with the new major as the sole holder.
Update nominee details and mobile banking registration details in all investments to enable direct management by the adult child when they turn 18 years old. Hand over login credentials and original documents so that they can operate investments in the future.
Planning early and staying invested over the long term is the key to accumulating sizeable savings for your child’s future needs. Hopefully, the detailed guidelines covered in this article provide clarity on how to invest for your minor child and manage the process efficiently. Ensure you track and monitor all investments periodically so that the required corpus can be built up to achieve those long-term financial goals on behalf of your child with ease.
As per the Indian Majority Act 1875, a minor is defined as a person who has not completed 18 years of age. Therefore, anyone below the age of 18 years is considered a minor for the purpose of managing investments.
Yes, parents can create a special account for their children, called a demat and linked trading account. This allows the child to buy and sell investments like stocks and bonds, but until they turn 18, the parents must make all the transactions on their behalf.
The parent would need to complete KYC for their minor child above 10 years of age. Additionally, the birth certificate, identity, and address proof of the minor are required to start a mutual fund folio and link it to the SIP in the name of the minor with a parent as guardian.
Yes, in the absence of parents, grandparents can open a Sukanya Samriddhi account for their granddaughter if she is under 10 years of age by visiting the post office branch along with her birth certificate and other proof of child ID.
When the minor turns 18 years old, the guardian submits an account change request to the broker along with the KYC documents of the new adult. Signature verification is done, and the demat account is converted to a regular account operated directly by the former minor.
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