Know the pros and cons of investing in your child’s name

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₹1.5 lakh under section 80C of the Income Tax Act. “We also bought a term plan, started a systemic investment plan (SIP) in mutual funds (MFs) and invested in gold monetization schemes with jewellers. The SIP, though, was started with our bank accounts," she says.

Opening a bank account in a child’s name is not really necessary unless the parents intend to make investments in that account, say experts. There are advantages in doing that, they add. Since a person below the age of 18 is a minor, a bank account can only be opened along with one of the parents as the joint account holder.

So, why is it necessary for a minor to have a bank account? Nitesh Buddhadev, founder, Nimit Consultancy, says, “We have observed that clients don’t stick to their financial plans if all investments are in their own names. They redeem it for various purposes. But if the investment is in a child’s name, they will hesitate to withdraw it.

Capital gains are taxed in the child’s name if the investments are redeemed after they turn 18. It helps parents reduce their tax outgo on long-term investments." Withdrawals from MFs or interest income from fixed deposits before the child turns 18 is taxable in the hands of the parents even if these investments are in the child’s name. “It is clubbed with the income of the parent who is earning more," says Buddhadev.

Such passive income of up to ₹1,500 per year is tax exempt. The exemption is limited to two children in a family. There is one exception to this rule.

“If your children earn a one-time or recurring income because of their work, special talent or expertise, it is taxed in their hands. A separate ITR (income tax return) will need to be filed in their names," says Buddhadev. Experts say this