We all know how grandparents love to make you feel special always. They shower you with gifts, buy you anything you want, just to see you happy. Most of us cherish the memory of getting a special gift from our grandparents. Without them, no event would be complete for a kid, be it annual day at school or birthday party. And it’s the same way around for them too. They always want the best for their grand kids.
Mr & Mrs. Bupanna are spending their retirement life in Bangalore, their home town, after a long duration of public service in different parts of the country. Both their children are settled in different cities – one in India and the other in the US. Both Mr. and Mrs. Bupanna are well off with their pensions and both of them visit their grandchildren very frequently. They make sure they have the best gifts for the grand kids every time they visit. But, they always end up buying toys which the kids already have. This gives birth to the thought of gifting them some money as long term, which would become handy for them for studies abroad or starting a business in the future.
But Mr. Rao, who is near 65 years of age and living in Hyderabad, wants to make his granddaughter’s first birthday special. He does not want to give her cash or write a cheque nor an expensive gift. He wants to invest in her name. He says that it is her first birthday and he wants to invest for her education so that when she reaches that age, it will help her. But he is clueless on where to invest or how to invest.
There are many people like Mr & Mrs. Bupanna and Mr. Rao, who want to leave a legacy for their grandchildren by investing money to give them a secure future. However, many times, they just hand over money to the parents as they are not aware of the investment instruments that the grandchildren can access when they grow up.
There are several instruments in which one can invest in the name of grandchildren. But remember that, for this, parents’ signature and consent are a must. Here, we discuss ways by which you can leave a legacy for your grandchildren.
Different type of gifts for your grandchildren:
The mutual fund is one of the best long term gifts for your grandchildren. You can select either equities or debt fund or a combination of both as per your requirement and duration. The equity mutual fund will be a good choice if the duration of the goal is longer, as equities give higher returns than other asset classes over long periods. For example, the mutual fund has given average returns of 15 % in the last 10 years where gold has given a return of only 8-10% for the same period.
There are two ways in which you can invest in mutual funds for your grandchildren:-
1. You can invest in your own name and make your grand children as nominee through a will
2. You can invest in the name of the child as the funds allow to accept third- party cheques.
A grandfather can invest in a scheme in the name of the child. But parents are also required to sign on the form. To invest in the name of a child, he or she should have a bank account. The child should be the first and sole holder in the folio. There are some child-specific mutual funds from different AMCs in which one can invest. Some of those funds have a lock-in period so that the parent cannot withdraw money until the child turns major (18 years). These funds invests most of the money in equities, and small portions in debt and money market instruments. The important point to remember is that minors are not allowed to manage the investment.
The account is operated by parents until the child turns major. Grandparents have no role to play at any stage after making the investment. The know-your-customer (KYC) procedure is carried out for grandparents as well as parents. Photocopies of supporting documents such as birth certificate of the minor are mandatory while opening the account. In case the court has appointed someone a legal guardian of the child, a notarised photocopy of the court order should be submitted along with the application. The guardian cannot operate the account after the beneficiary turns major. Once the child become major, he or she has to go through the formalities for changing the account status from minor to major. This involves furnishing of PAN and bank account details, among other things.
The other option is to take life insurance and gift that policy to your grandchildren. There are different type of insurance policies available in the market, from which you can chose a better one. The two ways in which you can take an insurance policy are:
1. You can take an insurance policy in your name and make the child as nominee. Here your life will be insured and any claims arises will be paid to the nominee. In this case the guardian has to be the parents.
2. You can purchase a policy in the name of the child, were you can be a proposer and pay the regular premium. In this case the life insured will be child and your role will be only paying the premium. The guardian has to be the parent.
The written consent from the parent should be taken before buying this type of polices. The consent is a certificate given by the parents that they do not have any objection to it. Generally, only grandparents up to 60 years of age can buy a policy. After this, there is vesting period of 15 years. So, a grandparent who is 60 can continue the policy till only 75 years of age.
Most of the experts advise against buying policies with a child as life assured as it does not serve the purpose of securing her or his life financially. Once the child becomes a major, he can receive the maturity benefits after completing the necessary formalities. If not, the money flows into the account of the grandparent. No relative other than the parents or grandparents are allowed to purchase a policy in the child’s name.
But in the first case, the mortality charges of the policy will be higher as the life insured will be the grand parent.
National Saving Certificate (NSC)
If you hesitate to invest in equites and do not want to take market risk, the other option is to go for National Savings Certificate (NSC). NSC can be bought in the name of any minor irrespective of relation. There is no cap on the investment. You can start from as less as Rs. 100. NSC also qualifies for deduction under Section 80C for an investment up to Rs 1,50,000 per annum. On maturity, the certificate has to be signed by the child and attested by the guardian before it can be redeemed.
Sovereign Gold Bond (SGB)
The government of India recently launched a Sovereign Gold Scheme to provide an alternate option when it comes to owning gold. The grandparents can purchase the bond in your name or jointly with the grandchild. You can gift or pass the Sovereign Gold Bonds to your grandchildren by gifting or by transfer. In case the child is a minor, then the parents will hold it on their behalf. If they are major, you can transfer to them by seeking the assistance of the agent who sold you the bond or the post office from where you purchased it.
Long duration Term Deposits
The grandparents can take long term fixed deposits in the name of their grandchildren and make the maturity age as per their required period. There are two ways in which a deposit can be opened.
1. You can open a deposit in your name or jointly with your grandchild keeping him as the nominees as well as beneficiary.
2. You can open a fixed deposit in his name itself.
Gift through will
The grandparents can keep a certain portion of their inheritance to their grandchildren by making a provision in their will. This provision can be made while writing the will itself. He can also mention the transferring process in the will if he wants so.
In the case of any other schemes like PPF, Sukanya Samriddhi Yojana (SSY) etc., if the grandparent is the legal guardian of the child, then only he can open the account in the name of grandchild, if not it is not possible.
Any Gifts received from the Grand parents are not taxable in the hands of the receiver, anyhow any income rising from this gifts are taxable in the name of the grandchildren. If the child is a minor then this income will be clubbed with that of the parent whose taxable income is higher. Such parent shall be eligible for a deduction of Rs. 1,500 from his or her taxable income.
Dilzer Consultants Pvt Ltd.