Investing to provide for child higher education and marriage is one of the most important financial goals for any parent. There are two ways to hold such investments; in your own name or in the name of the child herself.
Holding investment in your name and assigning it to a specific goal is convenient but an investment in the name of the child has its own merits.
1. Having a separate investment account in the name of child helps in inculcating ‘saving’ habits in children. They can take pride in investing small monetary gifts received on festivals or from visits from grandparents and relatives. It also helps them in understanding how savings generate fund for future use when invested regularly.
2. Investment in the name of a child is more tax efficient. Once the child attains majority, the fund accumulated in her name is considered as her own. The gains are not clubbed with the parent’s income. Instead they are taxed in the hands of the child only. Normally, as children do not have any other income, the tax liability could be nil or nominal, but certainly less than that of parents who may be in high tax bracket.
3. Investment in child name also helps in more disciplined approach towards investment for child financial goals. In case of urgencies, it deters the temptation of withdrawing amount from funds kept aside for child’s future needs.
4. Also, as a child grows up and understands the discipline of SIP deduction from her savings account, she is most likely to continue with this discipline even from her income, once her career starts.
For investments in the name of a minor child, it is recommended to open a bank account in the child’s name and to make investment through that account. Bank account in the name of the child is also necessary as redemption proceeds will be credited into the child’s bank account only.