Is it Beneficial to Open Fixed Deposit Account in Minor’s Name?

Open Fixed Deposit Account in Minor’s Name

Fixed deposits are a great tool for investment. It is among the most popular destinations for Indians to deposit their savings. The accounts offer flexibility in choosing tenures and deposit amounts, while offering returns at over 8% p.a. interest rate. Fixed deposits beat a savings account hands down, but is a fixed deposit the right choice for your child?

Fixed deposit for minors

Opening a fixed deposit account in a minor’s name is a simple process. As a parent/guardian, you can simply approach your bank and complete the formalities to start a new fixed deposit account for your child. But is it worth it? Well, if you are looking for tax benefits then you’re out of luck. There’s practically no tax savings by opening a new account under the name of a minor. The earnings from your child’s FD will be collated with your earnings and tax will be calculated on the combined earnings. So, there goes your tax savings.

For instance, if the deposit rate is 9% and you belong to the 10% tax bracket. Then effectively you will get a return of 8.1%. If you are in the 30% tax bracket, then this figure falls down to 6.3%. Accounting for inflation, which has been hovering around 5-6% this year, you will practically get no tangible returns out of such an investment.

But fixed deposits do form an intrinsic part of your investment portfolio. There is a small tax saving of Rs.1,500 on incomes earned by a child. As such, of you invest Rs.15,000 in a fixed deposit account in your child’s name, you can potentially earn tax-free returns out of it every year, albeit low returns. This tax benefit is available for up to 2 children in a family. This gives you a great opportunity to invest up to Rs.30,000 in a long term FD of up to 10 years in your kids’ names and earn tax-free returns over the next decade.

Do I have any other options?

You can choose to invest in your own name rather than your child’s. This will make the whole process simpler and do away with some of the formalities. You can opt for your child as joint holder or nominee on your account. This will also give you an added impetus to continue the investment over the long term.

An investment in your name instead of your child offers you greater flexibility in managing the funds. You can choose to re-invest the money in a different goal at any point of time. But if the account is in the name of a minor, and that minor becomes a major, then you will have to take the consent of your child before making any changes to the account. Your control over the investment is substantially limited in these cases and all the cash will be transferred to the child’s personal bank account.

Having a joint account with your child will help in circumventing the problem of control over the account, even when your child becomes a major.

You should have a clear idea of your situation before deciding on the future course for your investments. You should ensure you are on the most efficient path to reach your goals. If you are certain you can conceptualize effective goals and can follow up on your decisions, then it won’t matter if the account is in your child’s name or yours. But if you lack a disciplined approach on the investments, it is better to let it remain in your child’s name so that they can access the funds when they need it the most.

RBI Circular – RBI Circular for Bank Accounts in the Names of Minors

Written by –  Open Fixed Deposit Account in Minor’s Name is written by Ileana Lyardson & can be reach at ileanalyardson@gmail.com

Related article – Fixed-income-asset-class and Various asset class for investment

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