How grandparents can invest for their grandchildren without hiccups

They don’t just play with them but also want to secure their future financially. Most of them give the money meant for the grandchildren to the latter’s parents. Investing in the name of grandchildren directly, unless the grandparents are their legal guardians, is not simple.

Take the case of Bengaluru-based Naga Subramanian. His father bought sovereign gold bonds (SGB) for Subramanian’s daughter in 2015. The physical bond document, which he gave to Subramanian, mentioned his daughter’s name as a bond holder.

He passed away in 2019. The bonds matured in August 2024. When Subramanian approached the bank to get the maturity amount, it was clueless about any such investment.

“Since my father had invested physically by visiting the bank branch, the investment had no digital trace. We had closed our father’s bank account. We reviewed his bank statement to see if interest payment of the bond was being credited during those years. The bank couldn’t help. We wrote to the Reserve Bank of India, but they told us to contact the bank,” said Subramanian.

After a lot of back and forth, Subramanian was finally informed that a new bank account had been opened in the name of the daughter in which the interest payment and the maturity amount had been credited. He is in the process of claiming it.

“The bank basically opened a new bank account in which it got the money transferred from my father’s bank account to invest in SGB. My father was not informed about it because he would have told me. He had anyway given me the physical bond paper,” said Subramanian.

It is questionable how the bank opened a minor’s bank account without her parents’ intervention, but one thing is clear: a grandparent cannot make the payment for any investment product via his bank account if the investment is in the name of their grandchild.

“A grandparent cannot open a joint account with the grandchildren either. So even if they want to start a fixed deposit for minors, they need to first deposit money in the children’s bank account. They can open it with adult grandchildren though,” said Samit Singh, a retired banker.

The same goes for mutual funds. Earlier, there was the concept of a donor, under which grandparents could have invested in the name of a minor child. Gift funds such as Axis Children’s Gift Fund and HDFC Children’s Gift Fund would accept money from grandparents, uncles and aunts.

However, the Securities and Exchange Board of India discontinued such third-party transactions. Now only parents, or if they pass away, the legal guardians, can invest on behalf of minors.

What grandparents should do

The best way for grandparents to invest in mutual funds for their grandchildren is by getting a bank account opened in the name of the child or children. It requires only a birth certificate and an address and identity proof of one of the parents.

Once this is done, the grandparents can simply transfer the amount to the child’s bank account. The next step is to sign up with the fund house in whose mutual fund scheme you want to invest. The parents can transfer a lump sum amount or start a systematic investment plan linked to the child’s bank account to invest in the mutual fund.

Another way is to buy mutual fund units in demat form in your name. Get a demat account opened for the child too. Grandparents can transfer the MF units to the child’s demat account.

However, the process is cumbersome. You need to fill up a delivery instruction slip, which can be obtained from the broker. It requires details such as the International Securities Identification Number (ISIN) of the MF units (available in the account statement), the depository participant’s ID and Beneficial Owner Identification (a 16-digit alphanumeric code that identifies the beneficial owner of securities in a demat account) and the quantity of units to be transferred.

Submit the delivery instruction slip along with the Client Master Report to the depository participant or broker physically or via courier. They will do the due diligence to process the transfer request.

Children’s insurance plans

Life insurance companies sell children’s education or savings plans, which are often pitched to grandparents who can buy the policy in the name of the child.

They can be the proposer and the payor of the premiums, and the life insured can be of the child. In some cases, they only become the payor and appoint the child’s parents as the proposer. The maturity amount always goes to the proposer.

Should you buy such plans? Insuring the life of the child is fine on paper, but morally unjustified.

What if the grandparents insure their own lives in a savings-linked insurance plan? They may not be able to get it due to health reasons or the premium will be too high.

This is why they become an easy target to pitch plans where the life insured is of the grandchild. They are told they are buying the policy for the child. In reality, however, if something happens to them, unless the child’s parents continue paying the premium, the policy will get closed.

“We receive a declaration from grandparents that if something happens to them, the child’s parents will pay the premium,” said an executive working with a leading insurance company who is not authorised to talk to the media.

Moreover, returns in children insurance plans are much lower than what you get in equity-linked products.

“The internal rate of return in such plans will be around 5%, if commission is on the higher side. In low-income products, it could be more than 6%. We advise to make a combination of a child plan and mutual fund investment so that a fixed amount can come from the policy and MF investment gives you growth,” said the insurance executive.

Tax angle

How much money can a grandparent transfer to their grandchild? There is no limit.

“The money you transfer to your grandkids does not attract any tax since grandparents are lineal ascendants. However, the income earned on this amount will be taxable,” said Nitesh Buddhadev, founder of Nimit Consultancy. “We advise creating a gift deed if the amount being transferred is significant, say more than ₹20 lakh.”

Who needs to pay tax on the income earned from the funds the grandparents transfer to the child?

Withdrawals from MFs or interest income from fixed deposits before a child turns 18 are 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,” said Buddhadev.

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

Mint take: There are multiple avenues for investments in the name of a child, ranging from fixed deposits to mutual funds and even NPS Vatsalya. However, only the parents and legal guardians are legally authorised to carry out such transactions.

Opening a bank account in the child’s name and putting money in it is the best solution. Zero in on an investment product in discussion with the parents.

The next best option is to keep doing it in your name and gift it to the grandchild via a will.