Turning 18 is a big milestone for children, as he typically leaves home for higher studies and takes baby steps towards independence, often leaving home to join some professional courses. The child becomes eligible to get a driving licence, vote, conduct financial transactions. For parents, it is the start of a new phase as they learn to let go. If the parent has a bank account for his child or has been making an investment in the name of children such as in PPF, Mutual Funds then some paperwork has to be done. And parents should introduce the child to his financial rights and responsibilities.  What paperwork should one do when the child turns 18?

Some basics about Tax, Investing in the name of Minor

Guardian is any person who is either the father or mother of the girl child or a person entitled under law to take care of the property of minor until she turns 18.

Investing and Minor: When the child is minor, a guardian can open a bank account, PPF account, Sukanya Samridhi account (for girl child), Mutual Fund account, Demat account for the child.  But these need to be updated when the child turns 18.

Tax and Minor:

• As per income tax rules, the income of minor children is clubbed with the parent having a higher income.
• There is an exemption of Rs 1,500 per child for two children in Income Tax for the parent. So you can invest Rs 15,000 earning 10% interest on each of your child’s name and get the interest tax free. When the child becomes an adult, the child income is not clubbed with that of the parent.
• As adult child income will be less than the parent, the parent can now invest in the name of the child and save tax, for example, open FD in name of the child or in PPF account one can invest 1.5 lakhs.

Important documents for the child, as discussed in our article, Important documents for your child,

• Birth Certificate
• Aadhaar
• Passport
• Class X, Class XII certificates and mark sheet

What should a parent do when the child turns 18

Get PAN for an adult child

Parents should apply for a PAN(permanent account number). This would be needed when the child starts earning but one can get before that also.

Permanent Account Number (PAN) enables the department to link all financial transactions to the person to prevent tax evasion. PAN is required for opening/updating a bank or Demat account, investing in mutual funds.

One can apply for PAN either online i.e. through the internet or offline. PAN cards are issued by the Income Tax department, but the front-end of the process has been outsourced to UTI Technology Services Ltd and the National Securities Depository Ltd(NSDL) since July 2003.  Self-attested Supporting documents (Proof of Identity and Proof of address) are required.

If the child already has PAN, then PAN has to be updated as PAN Card issued to Minor does not have the Minor’s photo or signature. To update PAN for minor one has to apply for correction in data of PAN Card and furnish photo and update his signature with the income tax authorities.

Our article What is PAN Card? How to Apply for PAN Card? explains PAN and process in detail.

Passport of Adult child

• A minor’s passport is valid for five years or till he attains 18 years, whichever is earlier.
• The minor applicant is eligible for Non–ECR(Emigration Check Required) till he/she attains the age of 18 years. ECR Passports are required by Indians who wish to travel to certain countries for employment. As per the Emigration Act of 1983, certain passport holders will have to procure an Emigration Clearance from the office of POE or Protector of Emigrants prior to travelling to certain countries.
• However, minors aged between 15 and 18 years may apply for a 10-year passport instead of a passport which is valid till they turn 18. If one has not passed class 10th then one will not get ECR.
• Fees differ for a passport for minor and adult. Fee for a 10-year passport is higher(regular fee for an adult) than the minor.
• It is important to note that a 10-year passport is issued only after police verification.

Bank account of Adult child

Open a bank account for adult child. Often done when child goes to college in another town or city and in a bank associated with the college. If one has a choice, one should open in too big to fail bank.

If the child has a joint account with a parent, it has to be updated. The guardian and child have to visit the bank and submit KYC documents(like Aadhaar).

After that child can conduct all the transactions independently, have his own debit and credit cards, issue cheques, open fixed or recurring deposits, conduct Net and mobile banking, transfer funds, link to UPI.

You can get add on a credit card for the child but explain to the child about how a credit card works? Why credit card is not free money? Dangers of not paying credit card bill full and on time, credit report.

Explain to the child about interest earned from Saving bank accounts, how interest is calculated, IFSC code, writing cheques, Ways of Fund transfer (NEFT, IMPS, UPI), dangers of mobile banking and internet banking, how should one not fall to phishing or tell the OTP to anyone.

PPF (Public Provident Fund) of adult child

When the minor turns 18 years of age, the parent should visit the post office or the bank where the child has PPF account with the adult child and submit an application regarding the change of status. His signature on the application form will be attested by the parent/guardian who opened the account of the minor. Following details need to be provided in this Form:

• Photograph, Name of Applicant
• PAN. Aadhaar Number
• Address
• Nominee

The further operations of PPF account would be handled by the adult child.

As the child is an adult, the parent can now invest 1.5 lakhs into the child account.

Sukanya Samriddhi Yojana (SSY)

Sukanya Samriddhi Yojana allows partial withdrawal for marriage or higher education once the holder turns 18, but the withdrawal is limited to 50% of the amount in the account at the end of the preceding financial year to meet education expenses or marriage expenses.

For this, not just a written application, but a documentary proof in the form of a confirmed admission offer in an educational institution or a fee slip from such institution clarifying such financial requirement is required. Further, the withdrawal amount will be restricted to the actual demand of fee and other charges required at the time of admission as shown in the offer of admission or the relevant fee slip issued by the institution.

Many people are under the impression that the money invested in Sukanya Samriddhi Yojana (SSY) is locked in until your daughter is 21 years of age. The lock-in period is actually until 21 years after the account is opened. This means if you open the account when your daughter is nine, you can fully withdraw the amount only after she is 30.

Demat account

Demat account can be opened in the name of a minor child by the natural guardian (parents) or court-appointed guardians only. The guardian has to submit the required documents and fulfil KYC norms. The date of birth of the minor has to be mandatorily provided, with proof.  The Demat account of the minor can only be operated by the guardian, till the minor becomes major. No trading account can be linked to a minor’s Demat account.

When minor turns major, the account becomes inoperative. A new separate account has to be opened in this case. Demat holdings can be transferred from minor account to major account. However, some organisations merely upgrade the existing Demat account to an individual one for the child to start operating it.

Mutual Funds

A parent can invest in Mutual Fund for the minor. For Mutual Fund investments made in the name of a minor through a guardian, payment can be made by means of cheque, demand draft or any other mode but it should be the bank account of the minor or from a joint account of the minor with the guardian only. A parent needs to provide his PAN details, bank account number and address proof.

Upon attaining the status of major, the minor, in whose name the investment was made, should provide all the KYC details, updated bank account details including cancelled original cheque leaf of the new account. No further transactions should be allowed until the status of the minor is changed to major. On 24 Dec 2019 SEBI removed the usage of parents accounts for mutual fund investment of child.

Explain to the child about what are mutual funds? Which mutual funds have you chosen and why?

Income Tax

The child will be treated as an adult for all taxation purposes, their income is no longer clubbed with that of the parents. If this amount is more than Rs 2.5 lakh a year, he will have to pay the taxes and file returns.

• You invest Rs 1 Lakh in FD offering 6% per annum for 1 Year.
• At the end of the year, you would get Rs 106,279 with 6,279 as interest.
• If you fall in 30% tax bracket you would need to pay Rs 30% tax and would get only Rs 4200
• On the other hand, if the FD is on your adult child’s name you will not have to pay any tax at all if his total annual income is below the taxable limit

Insurance

An 18-year-old can also buy life, health, vehicle and other insurance policies in his name, though it is too early for most. Since 18-year-olds typically don’t have income or liabilities, they don’t need a life insurance policy.

Give your Children a Financial Headstart

Our current educational system honours only those kids who have great reading and writing (verbal-linguistic) skills. The Western educational system was actually a system designed in centuries ago to churn out good employees and soldiers for the state. It’s an ancient system that survives to this day which makes most people become followers rather than leaders. The measurement of a child’s IQ or Intelligence Quotient is simply his ability to learn within this limited system. IQ =100 X  (mental age/Chronological age)

But times have changed. We are in the new Information age. The best grades don’t count, those with the ability to adapt, learn new technology, and offer fresh ideas. Will survive and thrive in the Information Age. In the new Information Age, the older you are, the less valuable you are.

And we need in life Emotional Intelligence and Financial Intelligence.  Financial Intelligence is not about how much money you make, it’s about how much money you keep and how hard that money works for you. For example, when a bank grants a loan, it lends it out at 6% to the borrower and pays only 3% to the saver

SUCCESS IS THE FREEDOM TO BE WHO YOU ARE. More choices offer more opportunities to succeed. Your child should be choices to take control of his own destiny. given all the With each dollar and cent your child receives, remind him he has a choice as to how to use it to build his own wealth

I recommend EVERY PARENT to read the book, Rich Dad’s Rich Kid, Smart Kid: Giving Your Children a Financial Headstart, by Robert Kiyosaki, author of Rich Dad and Poor Dad. These are fundamental financial principles that are not taught in school or elsewhere. If you don’t teach your kids (and yourself) these principles, who will?? The best part of the book is the discussion about diverse learning styles of kids and the Colby index. A lot of information is highly repetitive.