Children’s higher education and marriage are typically the primary financial goals for most people. There are various products you can consider to invest for the two long-term goals. But when doing so, does it make more sense to invest in the name of the child, rather than in your own name?
Most experts are of the view that, except in a few cases, investing in the name of child does not provide any significant advantage to the parents. What you can do is earmark a certain portion of your saving for goals related to children and ensure you do not use the corpus for any other purpose. “We ask our clients about their goals and ask them to set priorities. Investing in a child’s name is not a factor when investing," said Manoj Pandey, director, Mainstream Investments Advisors Pvt. Ltd, a Delhi-based financial planning and wealth management firm.
We tell you about children-specific products available in the market and whether they offer any additional advantages.
Many instruments allow investments in the name of a child such as mutual fund schemes, insurance policies, Public Provident Fund (PPF) and so on.
Typically, insurance agents pitch schemes and plans which are labelled or marketed as child-specific plans. Though the names of some of these schemes, especially insurance plans, indicate they are customized for children, they provide no additional benefits such as additional return, tax deduction or exemptions, factors that are important to consider when investing.
“Insurance in the name of the child as the policyholder is an absolute no-no. Conceptually, term insurance is taken to protect the economic value of one’s life and it does not make sense when the child is not earning," said Lovaii Navlakhi, managing director and chief executive officer, International Money Matters Pvt. Ltd, a financial planning firm.
At the same time, if you have a PPF in your name as well as in the name of your child, remember that your overall investing limit for all your PPF accounts, including your children’s, will remain ₹1.5 lakh. Also, deduction will be available only up to ₹1.5 lakh. Returns from PPF are tax-free.
The only scheme that lets you invest in your child’s name is Sukanya Samriddhi Account (SSA), but only if you have a girl child. SSA is government’s social welfare scheme meant to promote the interests of girl children. Under this scheme, parents or legal guardians can open one account in the name of one girl child and maximum two accounts in the name of two different girl children. SSA offers a tax-free annual interest of 8.1% compounded annually, and contribution qualifies for tax deduction under Section 80C of the Income-tax Act, 1961. Returns from SSA are more than what other similar avenues such as PPF and National Savings Certificate provide.
Clubbing of income
Remember that even if you invest in your minor child’s name, the income or returns will get clubbed with the income of the parent (the one who earns more that the spouse) for taxation under Section 64. It will be considered income in the child’s hands only if he or she is above 18 years of age.
However, there is a small deduction available in case you invest the money in the name of your minor child. You can claim an exemption up to ₹1,500 per child every year, for a maximum of two children, under Section 10(32). For example, if you choose to invest in a fixed deposit, interest earned up to ₹1,500 in case of one child or ₹3,000 in case of two child can be claimed as exemption.
For some of you, buying products in the name of a child may help with goal-based investing and ensuring that you stay the course and don’t touch this money.
Some experts belive that investing in name of child make parents more disciplined. “It adds a natural purpose to the investment and substantial longevity to the investment as parents’ expectations of the holding period is naturally set in their mind," said Rohit Shah, founder and chief executive officer, Getting You Rich, a financial planning firm.
Navlakhi agreed. “There is a magical force that prevents dipping into these investments and, hence, you are more likely to achieve the goal as a result of this discipline," he said.
Also, it can help you consolidate the small amounts of money that children receive from friends and family on special occasions. “The parents tend to end up investing a higher amount, with the cause of investing for children," added Shah.
But investing in a child’s name may involve additional paperwork both at the time of investing as well as exiting. You may also require to open a separate bank account in the name of the child for certain investments. Apart from that, keep in mind that once your child turns 18, he or she will get access and rights over the investments.
What can also work is creating an additional savings bucket for your children and reminding yourself why you have created the bucket.
Whether you invest in your child’s name or create a separate bucket, make sure the instrument you choose fits into your portfolio and does not hamper your asset allocation. Also, ensure that the maturity period or lock-in that the investments may have are in line with the child’s needs.