A Comprehensive Guide to Tax Benefits and Financial Growth
Investing in mutual funds in a kid’s name is not only a strategic financial decision but also offers significant tax advantages, especially in India. This article delves into the numerous merits of such investments, particularly from a tax perspective, and provides insights on how to maximize these benefits.
Why Invest in Mutual Funds in a Kid’s Name?
Investing in mutual funds for your child is a prudent way to secure their financial future. These funds are managed by professionals who allocate your money across various assets, thereby diversifying risk and providing potentially higher returns. When these investments are made in a child’s name, the advantages multiply, particularly in terms of taxation.
Tax Benefits of Investing in a Kid’s Name
One of the primary reasons to invest in mutual funds in your child’s name is the substantial tax benefits. This is especially true if your child is approaching the age of 18. Here’s why:
Taxation Prior to Kid Turning 18
Remember, until the child turns 18, all income or gains from investments in the kid’s name are clubbed with the income of the parent or guardian. Hence, it is best to invest with a long-term perspective and avoid selling mutual funds before the child reaches 18. This strategy helps maximize tax benefits and secure a better financial future for your child.
No Clubbing of Income Post 18
Until the child turns 18, any income generated from investments in their name is clubbed with the income of the parent or guardian. However, once they turn 18, this clubbing ceases. The income is then treated as the child’s own, which can result in significant tax savings. Under the new tax regime, capital gains up to ₹5 lakhs (1 lacs exemption for long-term capital gain and exemption of income up to 4 lacs for taxation purpose) and 4 lacs for taxatare completely tax-free in the hands of the child once they turn 18.
Tax-Free or Lower Tax Rates on Dividends
If you gift stocks or invest in stocks in your child’s name, dividends that would typically be taxed at the slab rate for adults may either be tax-free or taxed at a lower rate for the child. This further enhances the attractiveness of investing in a child’s name.
Advantages of Investing in Debt Funds in a Kid’s Name
Investing in debt funds in a kid’s name offers several advantages, particularly from a tax perspective. Since debt funds are taxed at the slab rate, any income from these funds up to ₹12 lakhs will be taxed accordingly. Given that the slab rate for kids until they start their regular job is quite low, this can result in significant tax savings. By investing in debt funds in a child’s name, parents can take advantage of these lower tax rates, making it a more efficient way to grow wealth for their child’s future. This strategy not only maximizes tax benefits but also ensures a better financial foundation for the child as they grow.
Steps to Invest in Mutual Funds in a Kid’s Name
To invest in mutual funds or stocks in a child’s name, parents and grandparents need to follow certain steps to ensure the process is smooth and compliant with regulations.
Open a Minor Bank Account
The first step is to open a minor bank account in the child’s name. These accounts are typically opened under the guardianship of a parent or guardian and are labeled as “on behalf of minor.” All financial transactions, gains, and incomes associated with this account are initially clubbed with the parent or guardian’s income for tax purposes.
KYC Compliance
When the child turns 18, they must complete full KYC (Know Your Customer) compliance, which includes furnishing their PAN card number and address details. Fortunately, KYC can now be completed online, making the process more convenient.
Conclusion
Investing in mutual funds in a child’s name in India is a strategic move that can yield significant tax benefits and help secure the child’s financial future. With proper planning and understanding of the tax implications, parents and grandparents can make the most of this opportunity. Remember, the key is to start early and stay informed about the latest tax regulations and investment options.
For personalized advice and to tailor an investment plan that suits your needs, it is always recommended to consult with a financial advisor.
Disclaimer: The above content is just for information and should not be construed as an offer to buy or sell or a recommendation. Contact your financial advisor for guidance on any investment-related query.
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Disclaimer: The above content is just for information and should not be construed as an offer to buy or sell or recommendation. Contact your financial advisor for guidance on any investment related query.
If you liked the above article and would prefer to be notified when we write next, please leave your contact details below: