Are you investing in your child’s name hoping it will reduce taxes? If yes, you would have been disappointed or will soon be disappointed when you file your tax return. You are bound to pay tax on the income earned from- investing in your child’s name. The culprit is a section under the Income Tax Act 1961 – Clubbing Of Income. Clubbing means that income from investments in the name of your spouse or children will be taxable in your hands. You child’s income can be taxed separately if the minor child earned the income purely by his skill and effort – for eg: a child actor.
Most investments made for children are long-term in nature. What people don’t know is that the tax you pay for these long-term investments is minimal. This is because, income tax laws favour long term investments.
· Equity funds invested more than a year are tax free
· Debt funds invested more than 3 years have indexation benefit, which will reduce your tax on capital gains.
Now you know that you should not waste time worrying about taxability but should focus more on investing well and securing your child’s future.
So then, why do some people invest in the name of the child? Are there any hidden secrets to this investment behavior? Should you be investing in your child’s name?
The answer is a NO. And, there is no hidden secret.
One ‘advantage’ of investing in your child’s name is that the few investments listed below do not allow the parent access to the money, when the child is a minor.
1. Sukanya Smridhi Yojana
2. Child insurance plans -Child Career Plan, Children’s Money Back Plan etc.
3. Specific mutual fund investments for Child Plan.
For most other investments, investing in your child’s name ensures discipline merely by psychological effect. When investments are in the name of your child it is unlikely that you would withdraw the amount midway. Parents are reluctant to discontinue an investment that is in their children’s name.
What happens to investments once your child turns 18?
Once he/she attains the age of 18 the guardian/parent can no more operate this account. All the documentation will change from the guardian/parent’s name to the major child’s name. In bank account, fixed deposits, mutual funds, everywhere you have to update your child’s status as major and also your child’s signature.
Parents lose legal control over the investment when the child attains 18. This is why parents should make investments in their own name. It ensures control over the investments. At age of 18, your child would just be entering graduation and is very young and impressionable. Hence it is important to retain control of your investments at this juncture.
Also, if the investments are in the child’s name, you have to arrange for the extensive documentation process described above.
So how to ensure discipline, control and convenience while investing for your child’s future?
It is really important that education and other needs of the child are taken care of. One thing that you can do bring in seriousness for your investments is to map the investment against a goal. Once you have earmarked the investments for your child, it has the effect of ensuring continuous, disciplined investment. If you want, you can also name your minor child as nominee with your spouse or parents being the guardian.
At FinMitra, we can ensure that your investments are mapped to goals such as education or marriage for your child. We can also assist with the paperwork required for investing and nominations. So, you get not only expert designed, personalised investment plans, but also convenience.
Now you know what to do. Don’t think too much, set a goal for your child’s future, start investing for your child, keep the investments in your name and always stay committed to your child’s future and investments.