“Why are you so worried?’ enquired Rajesh while getting up in the middle of the night. Naina was sitting near their newly furnished balcony with her laptop, coffee placed on the table. Her right hand placed over forehead clearly displaying some huge concern on her face. ‘Nothing really!’ replied Naina. However, it was not a very uncommon scenario as both of them were high flying professionals in their career and working through the night was a part of their life. But this time, something seemed different to Rajesh. He got up to see what Naina was working on and saw her staring at a wide excel sheet where numbers seemed to be dancing in themselves. A name flashed above all numbers – Aditya.

‘We spend so much money each month that we can’t even save for ourselves. Looking at our projections we won’t be able to provide an international education for him. I am trying to see where we can cut back on our expenses’ Naina said. ‘But we have already started investing in mutual funds from last many years’ countered Rajesh. ‘Yes, you can see those mutual funds becoming a BMW in our garage but that wouldn’t pay for Aditya’s education in future’ nagged Naina. Rajesh understood the silent message and called his friend Manish, a wealth manager for meeting them over the weekend.

‘I understand your situation. There is one way since Aditya is just 9 years old, you have an option to open an investment account his name. Both of you can contribute to that account every month and create that basket for his higher education.’ Manish suggested while sipping tea. ‘Investment in the name of a minor is possible?’ asked Naina. ‘Yes’ replied Manish calmly.

‘But you must look at both sides of the coin – ie. pros and cons of investing in the name of a minor.’ added Manish with a caution. ‘Most certainly’ replied Rajesh.

Pros

Wider Capital Base

‘How can create a wider capital base since no new money is introduced?’ asked Naina.

‘Perfect question. If your money is invested in 2 asset classes such as real estate and mutual funds, the base is comprised of 2 instruments. But when you buy gold, you have one more option to invest your money in the future. In the same way, by opening an investment account for Aditya, you give yourself an option to create a new basket. Slowly, when you will water this basket, you will see a wide base for your capital. This will not only help in reducing risk on your money but also serve as an allocation to different goals of your child when he grows up.’ added Manish.

Allocation towards a specific goal of child

‘Yes, we are already thinking about Aditya’s higher education and that’s precisely the reason why we want to start investing in his name.’ Rajesh said.

‘Absolutely, that’s a smart move to make. Why don’t you also start thinking about his marriage or invest for initial capital if he decides to start his own business? That way, you won’t have to wait for the last moment. Financial security will enable him to achieve more.

For that, you can start small. Create specific allocation of money towards each of his goals in such a way as to it compounds over time and helps you to save more in the later stages of your career. Retirement from a job is also an active truth that we all have to deal with’ Manish said with a smile.

Gift to Child

‘Would the transfer money be taxable in Aditya’s account?’ asked Naina.
Manish replied, ‘You can also show it as a gift to Aditya and since Gift Tax is no longer in force, it would not be considered for income tax purposes in the hands of your son. On a lighter note, it makes a lot more sense to gift him a strong future.’
Cons

Clubbing provisions

‘But would not be clubbed under my or Naina’s account for tax purposes?’ Rajesh asked while looking at Naina.

‘No. The transfer in the form of gift would not be considered as income in the hands of Aditya. Hence, he won’t be subject to tax on the same. However, any income generated from those specific assets would be subject to tax.

For example, you decided to invest his money in mutual funds and for some reason, decided to sell those mutual funds at a profit before the end of year 1. The short term capital gains arising from the sale of mutual funds will be clubbed with either your Naina’s account upon your decision.

Hence, taxation on different asset classes will be the same irrespective of a major or minor. Once again, it’s the income from the asset rather than merely your transfer which would be subject to tax.’ Manish said.

Flexibility for use of money reduces

‘Rajesh you will not be able to use that money to buy your Mercedes, remember that.’ winked Naina.

Manish smiled and said, ‘Yes, you can wish to use that money but then again you will have to go through the pain of taxation and transfer of that money. So flexibility to use this money will be reduced and bring about a strict discipline to stick to the goal allocated towards Aditya.’

Access to money is lost once child attains majority

‘Last question, when Aditya becomes 18 years old, how will the account operate?’ asked Rajesh.

‘Typically, an investment made in the name of a minor cannot be operated by the guardian once the minor becomes a major. Once Aditya will attain majority status, he will have to apply for a change of status in the investment. All the investment formalities such as PAN and KYC will have to be complied with.

Also, once Aditya is major, then you will lose access to that money. Now he will decide what he wants to do with it. Your instructions to the bank or investment account will hold no value. I am sure, Aditya will not misuse that money but it’s better to be vigilant about it and work accordingly at it.’ Manish replied to Rajesh.

Upon listening to the conversation, Naina handed over the excel sheet and along with it the concern of Aditya’s future to Manish and sipped a coffee with great satisfaction. Rajesh also now was happy to see Naina relaxed and thanked Manish for the same.

– Jinay Savla