“We recently received this question: My father (retired and getting a pension) would like to invest some amount in my son’s name yearly. He expects 1) to invest for his grandson’s future and 2) to get income tax benefits. Could you share some views on where & how we could proceed?”
“Based on research, I feel 1) VPF or PPF in the grandson’s name, with investment from the grandfather, is one option.2) Mutual Funds in the grandfather’s name with the grandson as the Nominee is another option. (It seems like I have to give KYC as guardian of the minor. Would this impact my ITR if there are capital gains in the above transaction?)
3) Children gift mutual funds with a long lock-in period.
4) National Savings Certificate”
“How can we correctly term it as a ‘gift’ to avoid unnecessary taxes? Are there any other options? Which is the better option among the above?”
The solution is rather simple, thanks to the new tax regime. With that, section 80C benefits are thrown out of the door. After accounting for the old tax regime, one will pay lower taxes in the new tax regime than in the old tax regime. So, there is no tax advantage if your father invests in PPF (VPF is irrelevant for him) or a small savings scheme.
Let us consider three options.
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- Ignoring tax benefits, If he does not have a current PPF account, he can open one, invest in it, and earmark it for the grandson. Your son can be the nominee.
- He can invest in mutual funds in his name with the grandson as the nominee. You will be the designated guardian without impacting your IT filings.
- He can “gift” you the money each month, and you invest it in a minor MF account.
In options 1 and 2, if, God forbid, your father dies early (before your son turns 18 or the PPF account matures), the money or MF units will come to your son.
If it is PPF, then it is tax-free. At that time, it can be invested in your son’s name and redeemed after he turns 18. There will be no tax implications for you.
If it is a mutual fund, the units can be transferred to your son’s name as he is the nominee. You must pay the capital gains tax if the units are redeemed before your son turns 18. If they are redeemed after he becomes a major, he will have to pay the tax depending on the rules applicable at that time.
In option three, you have full control. Any amount digitally transferred from the son to the father is tax-free. Typically, no specific paperwork is necessary to prove this as long as it is clear where the money comes from, and the amount is nominal.
To be safe, each year, you can get a consolidated gift deed for all the transfers made in a financial year from a CA to avoid any ITR queries. This is unlikely for nominal transfers.
The money can then be invested in a minor MF account and transferred to his name when he turns 18. There is no tax liability for you here (unless redeemed when he is a minor). Even if your father cannot continue transferring money for some reason, you can leave the investment as is (there is no obligation to invest each year) or continue with your funds.
You can choose the method that appeals to you. More importantly, we recommend proper goal-based planning for your son, considering realistic inflation estimates and appropriate asset allocation. The asset allocation should then decide where the money is invested – fixed income or equity.