Gifting grandchildren is a mixed feeling of indulgence, love, responsibility and righteousness. The question of legacy arises: let's do something we'll remember. Then law and procedure takes over. There was a time when the family's wealth was concentrated mainly in land, jewelry and these material goods. Agriculture and business were the main sources of income. Then, unfortunately, the laws did not allow the child to get a part of the family wealth. Many traditions in Indian society originated from the use of rituals and ceremonies to impart some wealth to girls on the occasion of their wedding, birth of a child, and many other such events. We have long moved away from this pattern of wealth accumulation.
Salary, investment and business income dominate the scene today. Daughters are entitled to their share of the inherited wealth. But the distribution of wealth still depends on rituals and ceremonies. The birth of grandchildren evokes these same feelings when wealth should be shared and the distribution should indicate the wealth and prestige of the family. Modern grandparents are well aware of the futility of giving away gold ornaments and clothing. The occasion demands it, as they say, and obliges without much protest. But there are many who like to give money and investments as gifts that allow the grandchild to use them as needed, or use them to fund life goals like education. But grandparent investment options are fraught with many procedural issues and paperwork, as well as requiring an understanding of product features.
Many years ago, when my child was 1 year old, her grandparents bought a bond that was marketed to make her a lakhpathi. Investing a small amount today will do the trick. Many grandparents bought them, only to find out after a few years that these bonds had a call option and matured below target. Let's make a list of points to consider when investing for the grandchild.
First, the child is a minor who cannot make a financial decision. The law considers null and void all contractual decisions made before the age of 18. Therefore, the investment must be made, managed and operated by another person on behalf of the child.
Second, the child's parents are the natural guardians by law. Therefore, they are free to open a bank account or make investments on behalf of their minor child. Grandparents are third. They are not natural guardians unless the unfortunate circumstances of the parents' death lead the courts to appoint them as such.
Third, an investment in the name of a minor child can only be made in products that allow such a facility. The minor child’s birth certificate is required to form a minority. It also shows the name of the parents, who must be registered as guardians for the investment.
Fourth, grandparents can make contributions to select mutual funds, postal savings products, bank deposits, stocks and bonds. In all these cases, the Products must allow a third party (the grandparent) to make an investment for the child (minor) with the guardians (parents) managing the account. KYC, Aadhaar and PAN linkage will be required for funds contributed by parents and grandparents. Product features may include a lock-in period or a limit on the amount that can be contributed each year.
Fifth, Indian tax laws allow gifts to be received from a specified list of relatives. These gifts are not taxed in the hands of the recipient. A grandchild who receives an annual monetary gift from a grandparent does not pay tax on the gift itself. However, any income generated from the gift is taxable. For example, a grandparent might make a deposit into a grandchild's small bank account. But the interest income generated by the deposit is taxable. Since the child is a minor, this income will be added to the guardian's income and taxed. The club provisions also stipulate that the minor's income must be combined with the income of the parent whose income is higher.
Sixth, all investment accounts for the minor will be individual withholding only. Minors cannot be co-participants.
Seventh, when the child turns 18, the invested funds can be accessed. However, the minor who is now an adult must have a full PAN and KYC process, and have her signature authenticated by the banker, in order to access the funds. Guardians cannot operate the account once the minor becomes a major.
The summary of these provisions in terms of the actual donation will be presented as follows: parents open a bank account for the minor child: investment by grandparents; Interest income is taxed in the hands of the parents. The grandfather buys a bond, a savings certificate for the youngest son. Maturity goes to the child after advancing in a career and completing paperwork. The grandfather invests in a child's mutual fund product as a third party. SIP can also be done up to a maximum of Rs 50,000. The fund registry is kept in the child's name and the parents act as custodians. The process is somewhat different if the parents and the child live abroad. The tax laws of the host country will apply to gifts, income and clubs. There may also be restrictions on the amount that can be received as a tax-deductible gift each year.
Grandparents who wish to make donations in the form of money or investments must necessarily act through the parents who are the minor's natural guardians. This cannot be overlooked. It can be procedurally easy to give the money to the parents and ask them to invest for the child. Unfortunately, many insist that their name is associated with the gift. It might make sense to acknowledge that parents know what's best for their children and that grandparents are next.
Grandparents can make the investment in their own account and name a grandchild as a candidate. Even in this case, the registration of the minor candidate needs the data of the tutor. Grandparents can write a will bequeathing part of their grandchildren. These options may make sense when the grandchild lives abroad. There are no tax implications for the child or parents until the date of the will. Grandparents insist that their gifts are acts of love. Why unnecessarily complicate this with procedures? Aren't acts of love in themselves a priceless gift? Should they be monetized?
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