Gifting to grandchildren is a mixed feeling of indulgence, love, responsibility and righteousness. The question of legacy comes in: let us do something we will be remembered by. Then law and procedure takes over. There was a time when family wealth was primarily held in land, jewellery and such physical assets. Agriculture and business were the primary sources of income. The laws then unfortunately did not allow the girl child to get a share of the family wealth. Many traditions in Indian society have arisen from the use of rituals and ceremonies to pass on some of the wealth to the girls on the occasion of their wedding, the birth of the child and many other such events. We have long moved on from that pattern of wealth accumulation.
Salary, investment and business incomes dominate the scene today. Daughters are now entitled to their share of inherited wealth. But the distribution of wealth still leans on rituals and ceremonies. Birth of a grandchild triggers these very sentiments when wealth must be shared and distribution must signal family wealth and status. Modern grandparents realise the futility of gifting gold ornaments and clothes. The occasion demands it, they yet say, and oblige without much protest. But there are many that want to give money and investments as gifts that allow the grandchild to use it as required, or use it for funding life goals such as education. But the investment options for grandparents are fraught with many procedural issues and paperwork, apart from requiring an understanding of product features.
Many years ago when my child was turning one, her grandparents bought a bond that was marketed to make her a lakhpathi. Investing a small amount today would do. Many grandparents bought them, only to find a few years later that these bonds had a call option and ended short of target. Let’s list the points to keep in mind while investing for the grandchild.
First, the child is a minor incapable of making a financial decision. The law considers any contractual decisions made before the age of 18 as null and void. Therefore, the investment has to be made, managed and operated by someone else on behalf of the child.
Second, parents of the child are the natural guardians under law. Therefore they are free to open a bank account or make investments on behalf of their minor child. Grandparents are third parties. They are not natural guardians unless the unfortunate circ*mstances of passing away of the parents leads to the courts appointing them as such.
Third, investments in the name of a minor child can be made only in products that allow such a facility. Not all do. The minor child’s birth certificate is mandatory to establish a minority. It also shows the name of the parents, who must be registered as guardians for the investment.
Fourth, contributions can be made by the grandparent into specified mutual funds, post office saving products, bank deposits, equity shares and bonds. In all these cases, the products must allow a third party (grandparent) to make an investment for the child (minor) with the guardians (parents) that operate the account. KYC and Aadhaar, PAN card linking will be required for parents as well as grandparents contributing the funds. The product features may include a lock in period or a limit on the amount that can be contributed every year.
Fifth, the Indian tax laws allow gifts to be received from a specific list of relatives. These gifts are not taxed in the hands of the recipient. A grandchild receiving an annual monetary gift from the grandparent does not pay taxes on the gift itself. However, any income arising from the gift is taxable. For example, a grandparent can make a deposit into the minor bank account of the grandchild. But the interest income arising from the deposit is taxable. Since the child is a minor, this income will be clubbed with the income of the guardian and taxed. Clubbing provisions also stipulate that the minor’s income must be clubbed with that of the parent whose income is higher.
Sixth, all investment accounts of a minor will only be on a sole holding basis. Minors cannot be joint holders.
Seventh, when the child attains the age of 18, the money invested can be accessed. However, the minor now turned major must have a PAN and complete KYC process and have their signature attested by the banker, to be able to access the money. Guardians cannot operate the account once the minor turns major.
The summary of these provisions in terms of actual gifting will pan out as follows: The parents open a bank account for the minor child: grandparent invests; the interest income is taxed in the hands of the parent. The grandparent buys a bond, saving certificate for the minor child. Maturity proceeds go to the child after turning major and completing the paperwork. The grandparent invests in a child specific mutual fund product as a third party. Can also do a SIP with the upper limit of Rs.50,000. The fund folio is held in the name of the child with parents as guardians. The process is somewhat different if the parents and the child are living abroad. Tax laws of the host country will apply for gifts, income, and clubbing. There may also be limits on how much can be received as taxexempt gift in a year.
Grandparents who want to give gifts in the form of money or investment have to operate necessarily through the parents who are the natural guardians of the minor child. There is no bypassing this. It might be procedurally easy to give the money to the parent and ask them to make the investment for the child. Many insist on their name being associated with the gift, alas. It might make sense to acknowledge that the parents know what’s best for their child and that the grandparent comes only next in line.
Grandparents can make the investment in their own account and name the grandchild as the nominee. Even in this case, a minor nominee registration needs the guardian’s details. Grandparents can write a Will that bequeaths a portion to their grandchild. These choices might make sense when the grandchild lives abroad. There are no tax implications for the child or parents until the date of bequest. Grandparents are adamant that their gifts are acts of love. Why needlessly complicate this with procedures? Aren’t acts of love in themselves a priceless gift? Do they have to be monetised?
(The author is CHAIRPERSON, CENTRE FOR INVESTMENT EDUCATION AND LEARNING.)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
