Bank account for a minor: The best way to optimize your children’s savings

Avir Tiwari’s wallet was so full that it couldn’t take it anymore. For the six-month-old boy, it wasn’t particularly a bad situation. 

However, his dad, Ekansh Tiwari, associate vice president of currencies at Natwest Group, certainly had a task on his hands. 

For, Tiwari had to find a way to lock the surprisingly large amount the newborn received during his mundan—a Hindu ritual that involves shaving off a baby’s first hair or birth hair. 

The solution, though, was simple. 

Most major banks offer minor bank accounts that the parents can open on behalf of their children. Think of it like a piggy bank with additional perks like online banking. 

One can also let their money grow by investing in instruments such as fixed deposits, stocks, and mutual funds. 

“Opening an account was quite a straightforward process since my father worked in Punjab National Bank (PNB),” said Tiwari. 

His daughter Asmi has ₹1 lakh in fixed deposit (FD) and ₹25,000 in her bank account.

The Tiwaris also opened an FD for their son. They put ₹50,000 in the FD, and ₹15,000 is lying as a balance in the account. 

PNB sent them a debit card, but they returned it because they wanted to avoid the temptation of withdrawing money from the account. 

Prakash Hegde, a chartered accountant, said if parents start FDs or mutual funds, etc., when the account holder is still a minor, then whichever parent has the higher income is liable to pay tax on it. Account holders start paying taxes on their own after turning 18.

The use case

A minor bank account has many advantages over a traditional piggy bank. One can invest in FDs, mutual funds, stocks, the public provident fund (PPF), and the Sukanya Samriddhi Yojana. 

In today’s digital world, children above a certain age will also benefit from pocket money in their bank account. 

For some, it can also help to build a habit of segregating the child’s expenses into the minor account and not mixing them with others. 

Samit Singh opened a minor bank account for his son when he was seven years old. His primary goal was to open a PPF account in his son’s name. Parents can open a PPF account on behalf of their children, but the contribution limit is up to ₹1.5 lakh per year.

The minor bank account also came in handy when his son went to a different state for schooling. Banks allow minors who are at least 10 years old to use a debit card and perform transactions on their own. 

ICICI Bank issued a debit card in the minor’s name with a daily transaction limit of ₹5,000. The minor could also use UPI on his mobile for transactions. Singh monitored his son’s transactions through net banking. 

“I had to change the phone number in the account when my son turned 15 so that he could use UPI on his phone,” said Singh. “I know parents whose son didn’t have a minor bank account were doing transactions on behalf of their son with QR code screenshots their children use to send every time.”

When the son turned 18, he had to perform fresh KYC with new documents like his permanent account number (PAN) to convert the minor account into a regular savings account. After that, the daily limit was increased, and Singh no longer had access to transaction details on his son’s account.

The benefit of compounding

The Tiwaris haven’t invested in mutual funds as they didn’t want to risk the principal of their children’s gift in any way, even though they invest a part of their own money in equities. 

On the other hand, Mohit Vij, vice president at Motilal Oswal Private Wealth, invested the bulk of his son Abeer and daughter Misha’s savings into equity mutual funds.

A minor bank account is not necessary to open a mutual fund account, but it is a must to redeem it. When it comes to trading stocks, Zerodha, the second-largest stockbroker in the country in terms of users, said minors can open an account but cannot buy stocks on their own. 

“The parents can either buy and then gift securities to the minor,” says the stock broker on their website. Intraday stock trading and future and options trading are not allowed for minors.

Vij said they opened a minor account each for their son and daughter at HDFC Bank and ICICI Bank, respectively. One account has him as a guardian, and the other has his wife as the guardian. 

Coming from the wealth management industry, Vij knew the power of compounding in equities over the long term and invested most of the gifts his children received in diversified equity mutual funds. That said, he also invested a part of the corpus in the Sukanya Samriddhi Yojana for his daughter and PPF for his son since it was a tax-free debt.

The Sukanya Samriddhi Yojana is a government-backed savings scheme for the financial security of girl children.

Habit builder

If not for a separate bank account for the minor, many parents would have taken the monetary gifts into their own hands or put them in their accounts. The first case makes it prone to spending when household expenses come up, and in the second case, the gift gets mixed up with the parent’s account.

Rupesh Kumar knew this and started planning to open a bank account even before his daughter was born. When his daughter was born, the bank told him they needed their daughter’s Aadhar card to open the account. When his daughter was 10 months old, they opened a minor bank account for her in ICICI Bank. 

Kumar’s wife also insisted on spending less on photoshoots and other ceremonies, which formed the initial corpus of the minor account.

The funds were invested in the Sukanya Samriddhi Yojana. Kumar tries to ensure he puts some money aside from his salary every month to utilize the ₹1.5 lakh limit available to Sukanya accounts every year.