Should You Invest in Your Child’s Name?
Saving and investing in kids’ education is a top and non-negotiable goal for many parents. One big reason for this is that education inflation in India is much higher than consumer inflation. Many parents also explore foreign education for their children, which requires a much more investment outlay. In this context, some parents try to invest in a child’s name, thinking that this approach may prove to be advantageous. This article examines the usefulness of investing in a child’s name from various angles to help you make the right decision.
#1: Taxability: A popular reason parents invest in their child’s name is a wrong assumption that they will not have to pay tax on the income from that investment. This is entirely incorrect and can cause a lot of unnecessary pain during a tax assessment. As per the tax provisions in India, the child’s income needs to be clubbed with that of the parent whose total income is higher. So, even if you invest in a child’s name, you need to include the income earned from that investment in your tax return and pay tax on that income. The only exception to this rule is where the child has earned the income by using his own skill and talent, such as acting, singing, etc. Speaking of tax planning, most government-backed Investments like PPF and SSY are anyways tax-free. So, there is effectively no difference if you invest in your name or your child’s name. For fixed deposits, it may depend from person to person. People generally pay tax on FDs every year, so it does not make any difference even if you invest in a child’s name. The only minor exception is mutual funds, where you can defer withdrawal till the child attains majority (18 years of age). After that age, the capital gains from the investment will be taxable in the child’s name and not yours. However, since it is very rare not to touch a mutual fund investment for a decade or more, the practical utility of this approach is quite limited.
#2: Focus and discipline in saving: Suppose you are one of those who are not very disciplined when it comes to money. In that case, there is a specific psychological advantage you get by investing in a child’s name. Imagine that you want to go for a vacation or splurge on a gadget and look out for the financial reserves you can draw upon. And there you see, the financial statements bearing your child’s name. This fact may (not at all times, though) stop you and make you reflect on your proposed decision. You can see that you are damaging your child’s long-term prospects of getting into the right college for your short-lived impulse of a good phone. This realization and your care for your kids can keep you from pressing the “Proceed to Checkout” button on your shopping website. This approach can also help you be more motivated to invest consistently in your child’s education. This is because now you can clearly “see” the link between your investment & your child’s long-term future.
#3: Control over money: Please note that when you invest in a child’s name, they become the legal owner of that money once they turn 18. When the child is small, it is not easy to predict how they shall be as a grown-up. You can’t also predict whether he shall be serious and committed to making the best use of the corpus you so painstakingly build for them. Remember: Once your child turns 18, You cannot transfer the ownership back in your name without the express consent of your child.
#4: Ease in goal planning: Investing in a child’s name does not make any significant difference in your ability to plan your finances. You can follow goal-based planning and easily earmark the specific investments towards child education goals. For example, suppose you invest in four mutual fund schemes for your various financial goals. In that case, you can choose one scheme towards the education goal and earmark it towards this goal. Alternatively, suppose you invest in one scheme in which you invest for your retirement as well as your child’s education. In that case, you can invest in two separate folios to track your investments for each goal.
#5: Legal issues: Investing in a child’s name can prove to be a complication in the rare event of divorce. In such a case, a husband must pay maintenance to the wife for herself and the children. If you have invested heavily in the child’s name from your own income, it may be difficult to reclaim that money at that stage. However, the exact implications of this approach and the way out can only be done after a thorough legal assessment.
Our view: It is worth investing in a child’s name? As we have explored from multiple angles above, there is no significant advantage from investing in a child’s name. The only exception is the slight psychological advantage that can accrue to you if you are not a disciplined investor. Hence, it may be a better idea to retain complete control of your finances by keeping investments in your own name. This will help you retain the rights to distribute the money depending on your financial situation and the child’s worthiness to receive that money. The only exception to this rule is a separate bank account for the child. You can deposit the monetary gifts received by the child on festivals and occasions into that bank account. You can also consider investing in their name from that bank account if the amount is significant. It is also essential to set the right expectations with the child regarding funding their education and keep planning for your own retirement as your first priority.
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